Petition — Bethlehem Steel Corp. v. United States

44-1640

—

—

IN THE

Supreme Court of the United States

Octoser TERM, 1974

No. 74-

BETHLEHEM STEEL CORPORATION,

Petitioner,

v.

UNITED STATES OF AMERICA,

Respondent.

APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF CLAIMS

ALBERT R. CONNELLY,

One Chase Manhattan Plaza,

New York, N. Y. 10005

Attorney for Petitioner

Of Counsel:

GEORGE VRADENBURG III,

One Chase Manhattan Plaza,

New York, New York 10005

June 26, 1975

APPENDIX

TABLE OF CONTENTS

Bethlehem Steel Corporation

v. United States, 423 F.2d.

300 (Ct. Cle 1970) soeeeeeeeeeeee l

Appeals of Bethlehem Corporation

Oration, ASBCA Nos. 10316 and

10317 (Reinstated),

Decision on Government's

Motion for an Order Establi-

shing that the ASPR Non-

Weighted Profit Guidelines

Are Applicable to Determining

Contract Price, dated January

Ds eee asdueeeeenesucececse 21

Order of the United States of Court

of Claims dated July 1, 1971,

denying Bethlehem's Motion for

an Order Terminating Stay and

POE GERGG Meligs .cccccccccs 41

Appeals of Bethlehem Steel

Corporation, ASBCA Nos. 10316

and 10317 (Reinstated), dated

WO Dale BOTS 6cecceesccéccs 42

Bethlehem Steel Corporation v.

United States, 511 F.2d. 529

Gome Ghe BOVE) ceccncesececncss 133

Order of the United States Court

of Claims, dated March 28,

1975, denying Bethlehem Steel

Corporation's Motion for

Rehearing and Reconsideration 161

BETHLEHEM STEEL CORPORATION

Vv.

UNITED STATES

No. 44-68.

United States Court of Claims

March 20, 1970.

Albert R. Connelly, New York City,

for plaintiff, James C. Hansen, New York

City, of counsel.

James F. Merow, Washington, D.C.,

with whom was Asst. Atty. Gen. William D.

Ruckelshaus, for defendant.

Before COWEN, Chief Judge, and

LARAMORE, DURFEE, DAVIS, COLLINS,

SKELTON and NICHOLS, Judges.

ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

AND DEFENDANT'S CROSS-MOTION FOR SUMMARY

JUDGMENT

NICHOLS, Judge:

This is an action to recover amounts

claimed to be due the plaintiff under

labor and material escalation clauses in

Contracts Nobs-3556 and Nobs-3648, under

which plaintiff built five destroyers for

the United States Navy at the shipyard

it then owned at Quincy, Massachusetts.

The contracting officer denied all escala-

tion but in disputes clause appeals the

Armed Services Board of Contract Appeals

(ASBCA) allowed upward adjustments under

the two contracts in the amounts of

$1,064,151 and $876,028, respectively,

which it computed as an allowance of 5%

profit on costs after restoring certain

cost disallowances the contracting offi-

cer had made, not here in issue. This

being less than plaintiff's claims, it

seeks review here under Wunderlich Act

standards, 41 U.S.C. §§ 321 and 322. The

parties have filed cross motions for sum-

mary judgment. We deny both motions and

suspend further proceedings in this

court to enable the parties to apply to

the ASBCA for further findings of fact,

pursuant to the opinion that follows.

The contracts were awarded by

negotiation and included standard provi-

sions requiring the contractor to exclude

from its cost estimates all contingency

allowances for increases in labor and

material costs from the levels then

obtaining, but on the other hand, allowing

price increases according to an agreed

formula reflecting labor and material

cost increases experienced in the con-

tract period by shipbuilders agreed upon

as representative. There is no dispute

that such cost increases did occur, nor

as to the contract price increases that

would result, except for Article 6(e),

o3eq

which reads as follows:

(e) The Contracting Officer may

deny, in whole or in part, any upward

adjustment in the contract price re-

quired under this Article if the Con-

tracting Officer finds that such ad-

justment is not required, in whole or

in part, to enable the Contractor to

earn a fair and reasonable profit

under this contract.

This contract language came before us for

interpretation three years ago in Newport

News Shipbuilding & Dry Dock Co. v. United

States, 179 Ct.Cl. 97, 374 F.2d 516 (1967).

The nub of the controversy here is how to

apply the rulings then made to the some-

what different facts and regulation before

us now. These facts are stipulated, so

far as they go, the Board having taken no

testimony. The refusal of any escalation

clause increases by the contracting offi-

cer, and the refusal of portions of the

amounts otherwise accrued, by the ASBCA,

resulted from their beliefs that the

amounts they denied were not required to

enable plaintiff to earn fair and reason-

able profits under the contracts. Both

decisions were, however, rendered before

ours in Newport News. Plaintiff would

remand for further Board proceedings in

light of Newport News, but defendant says

Newport News is not applicable and the

Board decision is entitled to finality.

The Navy decided to build three

destroyers (DD 936-938) in a private yard.

On or before January 25, 1954, it received

proposals for major east coast concerns as

follows, per ship:

~_

Bath Iron Works ....¢.-e-eeeeee+ $15,492,000

Newport NeWS .....eceeeeeeeee- 16,800,000

Quincy (plaintiff) ........... 18,674,000

Hew YOeR GRID .cccscsesceccees Beene

As usual in negotiated procurement, all

submitted cost estimates which showed that

they anticipated profits of 9.3% of cost,

in the case of one, to 9.4% for another,

and 10% in the cases of Quincy and the

fourth. Defendant, however, desired to

award the vessels to Quincy because

Quincy was about to run out of work and

if it did, management would probably close

down the yard, which was one of the largest

and best equipped in the world. Moreover,

plaintiff maintained at Quincy the design

and engineering staff for all its several

other shipbuilding and repair yards on

both coasts. The anticipated closure,

therefore, would have effected a material

reduction in the capacity of the shipbuild-

ing industry to produce for national defense

in case of any emergency. Since World War

II, the Navy had on one or more occasions

bailed all of the above named companies

out of potentially disastrous slumps in

their business by awarding them shipbuild-

ing contracts when they were not the

lowest bidders. They were painfully

dependent on the Navy, for all other cus-

tomers together accounted for but 35% of

their business, yet even the Navy's orders

were at a modest level pending the wearing

out or obsoletion of the vast tonnages

delivered in World War II. All four yards

were, therefore, operating at a minor

fraction of capacity. The three other

than Quincy, did have enough orders to

keep them busy at the then level of activ-

ity for a year or two to come, so it was

only Quincy that was in immediate danger

oS-

of shutdown. The Navy, accordingly, decided

to negotiate with Quincy.

To avoid making a bad situation worse,

the Navy asked plaintiff to reduce its

bid and it took $1,000,000 off the price

of each ship, and the award was made at

$17,674,000 per unit, which was still con-

siderably over the bids of Bath Iron Works

and Newport News. The revised cost esti-

mates remained unchanged, but showed that

plaintiff was now estimating a profit of

$698,000 instead of $1,698,000. There was,

however, no contract provision that plain-

tiff's profit would be any particular figure.

One asks next why plaintiff esti-

mated its costs so much above competitors

who were, by its account, no more efficient,

and had no better plant. The answer 1S_

that the three destroyers would have util-

ized only 5% of Quincy's capacity. In

estimating its costs, Quincy calculated

it would have no other business and the

contract for the destroyers would have

had to carry the overhead of that vast

establishment. Evidently the Navy had

to contribute towards this overhead if

it was to persuade plaintiff not to close

the plant down. Bath, being smaller and

busier, was far more favorably situated

with respect to overhead. We conclude

that in the events that materialized,

that is, Quincy's receiving other orders,

the allocable overhead would have been

less, and therefore the costs.

The circumstances of this award are

given because, as wili appear, they afford

the basis for defendant's argument that

Newport News is not applicable as a pre-

cedent. The facts stated above were either

_

found by the Board, or else appear as

testified in the prinvced transcript of a

hearing conducted by a subcommittee of

the House Armed Services Committee in

February and March, 1954, to inquire

into the award of Nobs-3556 and the re-

jection of the low bids. The parties

here attached it to their stipulation as

Exhibit 6, without restriction as to

relevarce or use, so we use it as uncon-

tradicted evidence.

The other contract in this litiga-

tion, Nobs-3648, was awarded plaintiff

later the same year and called for con-

struction of two additional destroyers,

DD 943 and 944, at a negotiated price of

$16,250,000 per ship, including an esti-

mated profit of $698,000. There was,

therefore, a cost saving estimated. It

had the same limited escalation as Nobs-

3556. There were other awards not involved

in this litigation while the five destroyers

were under construction, notably a nuclear

powered cruiser and three guided missile

frigates. Plaintiff delivered the first

destroyer on November 30, 1956, three more

in 1957, and the last on February 26, 1958.

There were, as usual, change orders and

equitable adjustments therefor, not now in

dispute. The costs, except for those

extras and escalatable labor and material,

were lower than estimated, plaintiff says

due to cost savings all along the line.

The financial results under the two

contracts are set forth in detail in the

Board findings and need not be repeated

here at this time, especially since the

case may come before us again. To pose

the legal problem it suffices to say that

labor and material escalation before any

ofo

Article 6(e) exclusion, totalled $3,347,500

and $2,404,900 under the two contracts,

respectively. The profit before anv esca-

lation, but reflecting the Board's decision

as to allowable costs, would be $1,597,000

under Nobs-3556 and $775,000 under Nobs-

3648, making 3% and 2.3% of cost respec-

tively. The profit with partial escalation

allowed by the Board as stated above would

be 5% of cost under both contracts. The

profit with full escalation would be

$4,990,000 under Nobs-3556 and $3,180,000

under Nobs-3648, being 9.3% and 9.6% of

cost respectively. That the profit with

full escalation is so much over the con-

tract estimate is due, as said above, to

savings in non-escalatable costs, but the

Board did not perform any analysis to

determine how these savings were accom-

plished. The Board also considered profits

as a percentage of price, but we need not

go into that here.

Our Newport News decision interprets

the Article 6(e) language together with a

Department of Defense regulation in effect

when the administrative decision was made,

22 F.R. 5927, 32 C.F.R. §§ 3.808 and ff.

The former we viewed as requiring an

administrative determination as to what

a fair and reasonable profit would be under

the contract incorporating the clause in

light of the performance history and

financial results. Such a determination

would be a finding of fact, final in this

court if supported by substantial evidence

and made in accordance with law. The

latter, the regulation, we found to con-

tain language telling how such a deter-

mination was to be made, whether related

to initial pricing or any sort of con-

tract repricing. There was nothing to

@8-

show that in making the findings there

involved, the Board had employed or

intended to employ the technique the regu-

lation prescribed, and several statements

in the Board opinion afforded indications

that the regulation was not deemed applic-

able. We suspend further action to allow

the parties to apply for further Board

findings, without intimating any opinion,

or indeed, having one, whether the level

of fair and reasonable profits as the Board

had determined was adequate or not.

That case has stood on the books for

three years now without any sort of chal-

lenge on defendant's part, not even a

motion for reconsideration. Since our

holdings deviated to some extent from those

urged upon us by either party, they may well

have come as somewhat of a surprise, and a

motion for rehearing on the ground of sur-

prise would not have lacked dignity. As

things are, this is the first chance we

have had to learn defendant's views.

Defendant apparently agrees with us to a

large extent, and appears in general will-

ing for Newport News to be followed in

cases that reproduce its facts. That carries

important implication.

The contracts here, as in Newport

News, were made before the Pentagon had on

the books any regulation prescribing,

except in redeterminations, any technique

of determining a level of reasonable profits

for a defense contractor. The involved regu-

lations, however, when made, appeared to be

remedial, meant to safeguard defense con-

tractors against determinations as to a

reasonable profit level, arbitrary, perhaps

biased, or founded on "seal-of-the-pants

intuition", which contracting officers might

-9-

make without proper guidelines. Tlere is

no reason to postulate an intent to with-

hold such safeguards from parties to then

existing contracts, nothing to that effect

appearing either in the contracts or the

regulation. Defendant refers, properly we

think, to Thorpe v. Housing Authority, 393

U.S. 268, 89 S.Ct. 518, 21 L.Ed.2d 474

(1969), as being in agreement with our

position. Since Government officials are

presumed to act properly, it is reasonable

to suppose that the Pentagon would not

have promulgated clauses such as Article

6(e) unless contracting officers could

employ established teghniques and guide-

lines, even if unpubliShed and therefore

would not act arbitrarily. If any con-

tractor supposed he had rights vested under

a contract which were substantially sub-

verted by a regulation later adopted as

to how to determine reasonable levels of

profits, he might come into court and show

it. See Thorpe, supra, at p. 283, 89

S.Ct. 518. In the absence of such a show-

ing we cannot assume it would occur.

Defendant passes over in silence

the fact noticed by the dissenting judges

in Newport News, that plaintiff there

had done nothing to alert the Board to

the fact it was not following the Depart-

ment of Defense's regulations. That is

equally true of the instant case. It is

indeed, generally, a salutary rule that a

party cannot assign an error here that

he has not given the administrative

tribunal a chance to correct. But the

points plaintiff did make below were of

a nature that should have alerted the Board

to test what it was doing against applica-

ble regulations. We think an exception

in such a case must be made in the interests

-10-

of fairness when the error consists of a

mutual ignoring of a whole body of appli-

cable agency regulations. Agency officials

have considerable practical power to steer

the choice of issues to ground of their

selection, in proceedings before their

agencies. If attention is totally diverted

from applicable regulations the responsi~

bility for this error is not equal. Agency

officials have the means and the duty to be

aware of their own regulations to a greater

extent than outsiders. It is not fair to

throw the consequences of such a mutual

mistake wholly on the party least respons-

ible for causing it. We say this not

meaning to impugn the good faith of the

Pentagon officials, who apparently quite

sincerely believed that a clause such as

Article 6(e) was somehow something other

than the kind of pricing and repricing power

the guidelines were meant to cover. The

arguments made to us by both sides in

Newport News reflected a state of great

confusion on both sides as to what Article

6(e) was meant to do. The requirement for

exhaustion of administrative remedies is

not inflexible in some exceptional circum-

stances. E.g., Mallow v. United States,

161 Ct.cl. 207, 212 (1963).

This brings us at length to the

difference which defendant says exists .

between this case and Newport News. It 1s

not that the regulations involved are new,

though they are, as set forth below.

Defendant says that this case falls clean

outside all published guidelines for deter-

mination of a reasonable level of profit,

because the contracts were awarded to other

than the low bidder for the purpose of con-

tinuing the existence of an essential

defense facility. This position does not

require defendant to take issue with our

-ll-

holding in Newport News and it does not, yet

it likewise does not require defendant to

argue, as indeed it could not, that the

Board here paid any attention to guidelines

or techniques for determining a reasonable

profit level, as published by the Depart-

ment of Defense or anyone else, and in

effect at the time the Board decided. No

such publication is ever alluded to in the

Board decision. It does indeed use guide-

lines, but they are "do-it-yourself" guide-

lines constructed by the Board itself out

of arguments and suggestions of counsel.

As already pointed out, counsel on neither

side suggested to the Board that it should

follow the published guidelines, and that

is the obvious reason why it did not do so.

A Department of Defense regulation

that was in effect at the time of the

instant Board decision, and also that of the

contracting officer, was published in 1963,

28 F.R. 12546, 12555, amending 32 C.F.R.

Part 3, §§ §§ 3.808 and ff. It supersedes the

one we construed in Newport News. It states

and describes, with copious illustrations,

the "Weighted guidelines method" of deter-

mining reasonable levels of contractor

profits. Defendant does not now deny that

it would govern most decisions limiting or

refusing otherwise justified labor and

material escalation under Article 6(e),

and there is nothing in it that suggests

an intent to narrow the former scope. But,

defendant says, this case is an exception.

However, the regulation itself in § 3.808-2(b),

enumerates the recognized exceptions to it,

and the situation here involved is not on the

list. Any other exception must be authorized

by the head of the procuring agency, and no

such authorization is asserted here. On

the other hand, the statute defendant says

@12<

authorized this type of procurement to

keep a contractor in business. The Armed

Services Procurement Act of 1947 § 2(c)

(16), now revised and codified as 10 U.S.C.

§ 2304{a) (16) (1964), does not speak in

terms of any exemption from profit guide-

lines ordinarily applicable.

If defendant's postulated exemption

exists, it must be a large one. The

record shows that all of plaintiff's above

named competitors in the shipbuilding

industry were awarded major contracts at

one time or another between World War II

and 1954, when they were not the low

bidders, for reasons the same as those

which animated the award of Nobs-3556 to

plaintiff. The situation recurs so commonly

in our litigation with other industries

heavily dependent on defense work, that .

we may take judicial notice of it; a rigid

adherence to procurement from the lowest

bidder only is viewed in the Pentagon as

gradually freezing out the competition and

leading into single-source procurement. The

subcommittee recognized the validity of

this view in its hearing on the instant

award, as did the whole Congress, of

course, in enacting 10 U.S.C. § 2304(a) (16).

It would be strange if so large an excep~

tion to the use of the "Weighted guidelines

method" went unmentioned in the enumeration

of exceptions in the regulation itself.

The new regulation requires use of the

guidelines if cost analysis is required.

§ 3.808-1(b). Cost analysis 1s required

with respect to negotiated fixed price con-

tracts with escalation, all of which these

are. § 3.807-3(a) (2). To put it succinctly,

the alleged exception has every earmark of

having originated in the active mind of

defense counsel herein, not in the perhaps

more rigid thinking of the Pentagon.

7 6 EEEEEeEeEeEeEee—e—Oeee

-l13-

Defendant says that plaintiff agreed

to accept a profit of arovnd 5% in consid-

eration of being awarded the contract,

though not the low bidder, and therefore

use of the "Weighted guidelines method"

to produce a higher profit would be so

unfair that an exception to the method

must be implied. The contracts, however,

reflect that plaintiff agreed only upon a

price. The alleged agreement upon a profit

came in the revised cost estimates, which

showed estimated costs only $698,000 per

unit below the agreed price. Both parties

must have been aware that this estimated

cost was a figure plucked from the atmos-

phere. Mr. Strohmeier, plaintiff's vice

president, testified at the Congressional

hearing, without contradiction, that the

entire excess of his company's cost esti-

mates over Bath's was due to the higher

allocation of overhead, and this difference,

in turn, resulted from the hypothesis,

that the Quincy yard would be operating at

but 5% of capacity, having no other work

than the three destroyers. Even so, on

that hypothesis, the estimated allocation

he thought was insufficient. If his com-

pany built the three destroyers and had no

other construction at the Quincy yard, he

expected it to suffer a loss. On the

other hand, if it received enough other

business so it could operate at a "normal"

level, its contract costs would fall to

approximately Bath's estimates. In that

event, which was surely always possible,

and wholly apart from any savings due to

efficient manufacture, there would have

been a large windfall profit under Nobs-

3556, for whose recapture the contract

made no provision if one disregards the

Statutory renegotiation article. Defend-

ant’ does not and could not regard that

o14@-

article as contributing in any way to its

argument that plaintiff agreed to a profit

level of exactly 5%. The alleged agreement

to a 5% level, in a contract that viewed

prospectively could have resulted in

anything from a loss to a windfall profit

level, according to its terms, must be

regarded as located in defendant's coun-

sel's eyes alone.

As already noted, plaintiff in pre-

paring its cost estimates was required to

assume there would be no increases in

labor and material costs, and in analyzing

the possibilities of profit in the con-

tract, we have up to this point done so

likewise. In the more probable event

there were such increases, the escalation

clause became operative and in general

its effect would be, absent Article 6(e),

to stabilize the profit or loss at a fixed

dollar (not percentage) figure against any

degree of labor and material cost infla-

tion. There might be some small profit

or loss resulting from the escalation

clause itself, as the plaintiff's own

experienced labor and material costs might

be more or less than the general industry

experience used to fix the escalation

indices. There was nothing in the escala-

tion clause before Article 6(e), agreeing

to-a5% profit. In article 6(e) there was

certainly a possibility that the profit

would be cut, but 5% is not mentioned.

We have now examined every pertinent

part of the contract and nowhere find

agreement to a 5% profit level, while we

do find provisions that enable a profit

much exceeding 5%, whether or not esca-

lation was required, depending on con-

ditions which were perfectly foreseeable

-_= }

-15-

and which plaintiff would certainly exert

itself to bring about, i.e., a normal util-

ization of the yard. On the other hand,

the $698,000 profit estimate contemplated

a state of inadequate utilization which

could hardly have been expected or allowed

to be other than temporary.

While we say plaintiff did not agree

to 5%, we do consider that a high bidder

given a contract award purely to keep him

in business, might expect this fact to be

considered as unfavorable to him under any

rational system of profit limitation.

Defendant's view that the "Weighted guide-

lines method" would fail to give weight to

this apparently is basic to its argument

that the method is so unsuited to the

instant procurement that the exception of

it from the regulation must be implied.

We do not read the regulation that way.

The plaintiff's overhead allocated to

Contract Nobs-3556, was by the evidence

in the record entirely out of line with

that which the lower bidders would have

allocated. A Board applying the method

would be required by § 3.808-5(b) (3) to

analyze the overhead items of cost and

determine "how much they contribute to

contract performance." A range of 4-7%

is assigned to "manufacturing overhead"

and a range of 6-8% to general and ad-

ministrative expenses. We think the

Board would be within its charter in deny-

ing a return on that part of the overhead

which exceeded the allocation of other

shipbuilders. Moreover, under § 3.808-5

(e) (1) the Board is to make an analysis

"of the contractor's dependence on Gov-

ernment financial assistance * * *,"

If the dependence is great, it is a minus

factor in determining the allowable profit.

-16-

While the point may be débatable, we think

that the addition of a bonus to a contract

price to enable the contractor to maintain

uneconomically large facilities in being

is in reality a form of Government finan-

cial assistance and should be treated as

such.

On the other hand, the guidelines

attach favorable consideration in § 3.808-

5(e) to "Contractor's assumption of con-

tract cost risk." The guidelines here

look with least favor on a cost plus fixed

fee contract with full cost reimbursement,

and most favorably, at the other end of

the scale, on a "closely priced firm fixed

price contract" for a complex item, which

"would reflect a complete assumption of

cost responsibility." We have here a

firm fixed price contract for a complex

item, with only limited escalation, and

according to Mr. Strohmeier, a real pos-

sibility of loss prospectively considered,

if other business was not obtained. It

would appear Contract Nobs-3556 at least

is, on this factor, closer to the favor-

able than the unfavorable end-of the

scale. (Of course, we do not know from

the record to what extent,the loss would

have been an actual cash drain and to

what extent a paper wxite-off.) The

guidelines appear to be the Pentagon's

best thinking on the subject of the proper

administration of profit limitation

clauses, and this favorable consideration

of close pricing and assumption of risk

stands in stark contrast to the Board s

unfavorable consideration of what is

apparently the same thing: plaintiff's

willingness to accept a price shaved

close above the estimated cost.

It would, of course, be improper

-l7-

for us to make a determination ourselves

under the "Weighted guidelines method" for

the reasons explained in Newport News and

for the further reason that the record is

inadequate. To use the method one needs

to be well informed. The Board will no

doubt supplement the stipulation with

further evidence. We do not know whether,

by proper application of the method,

plaintiff will fare better or worse than

5%. Plaintiff desires to take its chances

under the "Weighted guidelines method" and

it has a legal right to do so.

As we have said, we see no injus-

tice or anomaly in applying profit limit-

ation techniques, as the Pentagon may

have amended and prescribed them from

time to time, up to the date of the deter-

mination. We would presume that changes

were intended to clarify and simplify, as

well as to reduce the impact of subjec-

tive factors in the mind of the adminis-

tering official. To some extent amend-

ments may reflect earlier departures in

actual practice, to a large extent no

doubt they are the product of experience.

If anything has been slipped in which

would impair vested rights unless limited

to prospective application only, let it

be pointed out. If we have erred in

thinking the "Weighted guidelines method”

is feasible to apply to the instant con-

tracts, the Pentagon even now could

amend or supplement its regulation, and

the Board would be bound, provided no

impairment of vested rights was attempted.

Any amendment purporting to reaffirm the

position now claimed, that officials

determining a reasonable level of profit

under clauses such as Article 6(e) are

not subject to any published guidelines

-18-

whatever in certain cases, at least would

advisedly be made in light of the recent

statement of the Supreme Court: "* * * a

broad, roving authority, a type of admin-

istrative absolutism [is] not congenial

to our law-making traditions."

Gutknecht v. United States, 396 U.S. 295,

90 C.ct. 506, 24 L.Ed.2d 532.

CONCLUSION

Plaintiff's motion for summary judg-

ment and defendant's cross motion for sum-

mary judgment are denied. Further proceed-

ings are stayed pursuant to Rule 167 for a

period of six months to enable the parties

to obtain further fact findings in accord-

ance with this opinion under the applicable

guidelines in published regulations. Plain-

tiff shall advise the commissioner of the

status of the case before the Armed Services

Board of Contract Appeals at intervals of

not less than 60 days beginning with the

date of this order, as prescribed in Ruie

167(e) and (f).

DAVIS, Judge (concurring):

Newport News, which I consider now

binding on me, settled the issue of whether

the ASPR guidelines were required to be

followed even though neither party invoked

them before the Board. That being so, I

agree with the court, for the reasons it

gives, that those regulations apply in

this case as well, and on that basis I

join in the disposition requiring them

to be applied here.

SKELTON, Judge (dissenting):

I respectfully Gissent. In my opinion,

|

-19-

Newport News Shipbuilding & Dry Dock Co.

v. United States, 179 Ct.Cl. 97, 374 F.2d

516 (1967), does not control this case

and it should not be sent back to the

board (ASBCA) in order to allow it to use

the guidelines of the Department of

Defense regulation published in 1963

(28 Fed. Reg. 12546, 12555, amending 32

C.F.R. §§ 3.808 and ff. (part 3)), to

determine the profit of the plaintiff in

this case, for the following reasons:

(1) This regulation was not in

existence at the time the contracts

involved here were executed and could

not have been contemplated by the parties.

Although the same situation existed in

Newport News, the facts in the two cases

are completely different. There the

court held that the regulation must be

applied to the original competitive

prices as well as to escalated prices,

but that cannot be done in the instant

case because the bids here were not com-

petitive. It is improper to apply the

regulation retroactively under these cir-

cumstances in our case. In fact, it is

impossible to apply the decision in

Newport News to the original prices here.

(2) The contracts before us were

negotiated between the parties and were

not the result of competitive bids. In

fact, they amounted to a subsidy by the

government, and without them the plain-

tiff would have had to have closed its

doors and gone out of business. Plain-

tiff was not the lowest bidder, as two

other companies submitted lower bids.

The government gave it the contracts

after negotiation to keep it in opera-

tion. As a result, the plaintiff has

-20-

been subsidized to the extent of a five

percent profit on the undertaking, but

instead of being grateful for this gener-

osity, now sues for more. It is imprac-

tical, if not impossible, to apply the

regulation to the prices thus negotiated

between the parties.

(3) The parties submitted guide-

lines to the Board that they wished it

to consider. The Board did consider them

fully, as indicated in its opinion. The

plaintiff did not ask the Board to con-

sider any additional guidelines and did

not mention those set forth in the regu-

lation which was in force at the time of

the Board's decision. No request was

made that the guidelines in the regula-

tion be considered. It is too late, in

my opinion, for the plaintiff to make

such a request, and it is error for us

to allow it to do so.

(4) The Board found as a fact

that the parties agreed that plaintiff's

profit would be five percent, and plain-

tiff has not challenged this finding.

Consequently, the finding is final and

we are bound by it and have no authority

to set it aside.

I would grant defendant's cross-

motion for summary judgment, deny plain-

tiff's motion, and dismiss plaintiff's

petition.

a

@2l-

ARMED SERVICES BOARD OF CONTRACT APPEALS

” Appeals of -- )

) ASBCA Nos.

Bethlehem Steel Corporation ) 10316 and

) 10317

Under Contract Nos. NObs-3556) (Reinstated)

and NObs-3648)

APPEARANCES FOR THE GOVERNMENT:

Samuel Pinn, Jr., Esq.

Counsel, Naval Ship Systems Command

Morris Amchan, Esq.

Associate Counsel

APPEARANCES FOR THE APPELLANT:

E. J. O'Brien, Esq.

Bethlehem Steel Corporation

Bethlehem, Pennsylvania

DECISION ON GOVERNMENT'S MOTION FOR AN

ORDER ESTABLISHING THAT THE ASPR

NON-WEIGHTED PROFIT GUIDELINES ARE

APPLICABLE TO DETERMINING CONTRACT

PRICE

STATEMENT OF FACTS

These appeals are here on remand

from the Court of Claims pursuant to the

order of the Court in Bethlehem Steel

Corporation v. United States, Ct. Cl. No.

74-68 (Decided March 20, 1970). The

appeals were previously decided by this

Board in an opinion dated 16 June 1966

reported in 66-1 BCA par. 5639.

The facts giving rise to this dis-

pute will not be repeated here since they

are set forth in the earlier Board

=22-

decision and in the opinion of the Court of

Claims. As the Board stated previously,

"The crucial proviso about which the dis-

pute arose is Article 6 of both contracts

entitled Price Adjustments and commonly

referred to aS an escalation clause,

which in pertinent part reads:

'(e) The Contracting Officer may deny,

in whole or in part, any upward

adjustment in the contract price

required under this Article if the

Contracting Officer finds that such

adjustment is not required, in

whole or in part, to enable the

Contractor to earn a fair and rea~

sonable profit under this con-

tract’.”

The two contracts called for a total of

five destroyers. After they had been

performed appellant made a claim for

price escalation pursuant to Article 6

which was denied by the contracting

officer as not required to enable appel-

lant to earn a fair and reasonable

profit under either contract. In decid-

ing the appeals subsequently taken from

the final decisions of the contracting

officer, this Board sustained appel-

lant's position in part, and allowed

escalation to the extent that appellant

would realize a 5% profit on costs.

Appellant had claimed escalation suffi-

cient to enable it to earn a profit of

9.3% on Contract NObs-3556 and 9.6% on

NObs-3648.

Appellant then filed suit in the

Court of Claims endeavoring to recover

a greater amount of escalation than had

been allowed by the Board. The Court

-23-

reached a result similar to its decision

in Newport News Shipbuilding and Dry

Dock Company v. The United States, 179

Ct. Cl. 97 (1967), 1.e., that the Board

had erred in not determining fair and

reasonable profit in accordance with what

the Court regarded as the applicable

guidelines for establishing profit

objectives set forth in the Armed Serv-

ices Procurement Regulations (ASPR) at

the time the Board rendered its decision.

For the purpose of determining the

Bethlehem appeals, the Court said that

the Board should have applied the so-

called "weighted guidelines" as set

forth in ASPR Part 3-803, effective 15

August 1963. In its Newport News

opinion the Court said that the Board,

in deciding the Newport News appeals

should have applied the so-called "non-

weighted guidelines" set forth in ASPR

3-808 effective January 1960. The

Board had decided the Newport News

appeals in 1962. The “non-weighted

guidelines" were superseded by the

"weighted guidelines" in 1963. The

“weighted guidelines" appear in the

presently effective ASPR 3-808.

In reaching its decision in the

Bethlehem case, the Court discussed the

type of analysis which it thought the

Board might undertake in applying the

"weighted guidelines" to determine fair

and reasonable profit on the basis of

relevant facts. However, the Court did

not purport to determine the amount of

profit to which appellant might be

entitled through application of the

weighted guidelines. In the language

most relevant to resolving the inter-

locutory question now before us, the

-24-

Court said:

"Tt would, of course, be

improper for us to make a determina-

tion ourselves under the "Weighted

guidelines method' for the reasons

explained in Newport News and for

further reason that the record is

inadequate. To use the method one

needs to be well informed. The

Board will no doubt supplement the

stipulation with further evidence.

We do not know whether, by proper

application of the method, plain-

tiff will fare better or worse than

5%. Plaintiff desires to take its

chances under the "Weighted guide-

lines method' and it has a legal

right to do so.

“as we have said, we see no in-

justice or anomaly in applying profit

limitation techniques, as the

Pentagon may have amended and pre-

scribed them from time to time, up

to the date of the determination.

We would presume that changes were

intended to clarify and simplify,

as well as to reduce the impact of

subjective factors in the mind of

the administering official. To

some extent amendments may reflect

earlier departures in actual prac~

tice, to a large extent no doubt

they are the product of experience.

If anything has been slipped in

which would impair vested rights

unless limited to prospective

application only, let it be pointed

out. If we have erred in thinking

the ‘Weighted guidelines method' is

feasible to apply to the instant

a

-25-

contracts, the Pentagon even now

could amend or supplement its regu-

lation, and the Board would be

bound, provided no impairment of

vested rights was attempted. Any

amendment purporting to reaffirm

the position now claimed, that offi-

cials determining a reasonable level

of profit under clauses such as

Article 6(e) are not subject to any

published guidelines whatever in

certain cases, at least, would

advisedly be made in light of the

recent statement of the Supreme

Court: '‘'* * * a broad, roving

authority, a type of administrative

absolution [is] not congenial to

our law-making traditions.’

Gutknecht v. United States 396 U.S.

295, (adecided January 19, 1970),

slip op. at p. 10.

CONCLUSION

"Plaintiff's motion for sum-

mary judgment and defendant's cross

motion for summary judgment are

denied. Further proceedings are

stayed pursuant to Rule 167 for a

period of six months to enable the

parties to obtain further fact

findings in accordance with this

opinion under the applicable guide-

lines in published regulations.

Plaintifff shall advise the commis-

sioner of the status of the case

before the Armed Services Board of

Contract Appeals at intervals of not

less than 60 days beginning with

the date of this order, as pre-

scribed in Rule 167(e) and (f)."

-26-

After the Court's decision was issued,

the Navy applied to the ASPR Committee

for a "deviation" providing for the

inapplicability of the weighted guide-

lines to ship construction contracts

executed prior to 1963 which contain the

profit limitation feature of the escala-

tion clause (Article 6(e)). Eleven such

contracts were listed, including the two

involved in these appeals. In his memo-

randum to the Chairman of the ASPR Com-

mittee dated 22 May 1970, the Navy Legal

Member of the Committee discussed the

Court of Claims and Board decisions in

Newport News and Bethlehem, quoted por-

tions of the Court's Bethlehem decision,

and advanced reasons for the Navy's

position that "the weighted guidelines

were not intended to be retroactive so -

as to affect contracts executed prior

to the promulgation of the Revision of

August 1963."

The ASPR Committee met on 3 June

1970 to consider Case No. 70-2-16

referred to in the minutes of the meet-

ing as "Deviation from ASPR 3-808,

Profit Guidelines." After considering

the memorandum submitted by the Navy

Legal Member, the Committee reached the

following decision as recorded in the

minutes:

"The Committee agreed that manda-

tory application of the weighted

guidelines retroactively to con-

tracts entered into before adop-

tion of such guidelines, partic-

ularly with respect to contracts

containing the . . . escalation

clause, was not intended and a

deviation is not required. The

PO eT ee ey

x=

Committee also agreed that applica-

tion of the weighted guidelines to

pre-existing contracts is not appro-

priate, and on a consensus basis that

it is not feasible, since they

effected a substantive change in

the standards existing at the time

the contracts were entered into and

were intended for the development

of a profit objective for negotia-

tion of future contracts. .. ."

The Committee referred, in this connec-

tion, to "Notes and Filing Instructions"

for promulgation of the weighted guide-

lines, which set forth the general

policy reasons for the issuance of these

guidelines, and prescribe mandatory use

of them to all “applicable procurements"

initiated after 1 January 1964.

In the final two paragraphs of the

minutes it is stated that:

"Notwithstanding the foregoing, the

Committee agreed that to the extent

that others may consider the appli-

cation of the weighted guidelines

to be mandatory in such circum-

stances, a deviation is approved.

"In taking this action the Committee

recognized that this would leave for

consideration, as applicable to the

listed contracts, the ASPR 3-808

non-weighted guidelines which pre-

ceded adoption of the weighted

guidelines. The former were not

regarded as effecting any signifi-

cant substantive change.”

The Executive Secretary of the ASPR

-28-

Committee has certified that the nine

Committee members present and voting

agreed unanimously on the above actions.

Under letter to the Board dated 26

June 1970, the Government filed a motion

seeking rulings by the Board:

"s. That the minutes of the ASPR

Committee meeting of 3 June

1970, re Case No. 70-2-16,

be admitted in evidence.

"hb, That by virtue of said action

of the ASPR Committee, the

Board enter an appropriate

order determining that the

procedural non-weighted

guidelines of ASPR 3-808,

rather than the weighted guide-

lines, in the regulation which

will be applied by the Board

to determine whether or the

extent to which, an upward

adjustment in the contract

price under the escalation

clause of the subject con-

tracts is required to enable

the contractor to earn a fair

and reasonable profit under

the contracts."

Appellant opposed the motion and tran-

scribed oral argument was presented by

both sides at a prehearing conference

held on 9 September 1970. Briefs on

issues raised by the motion were filed

by both parties and exchanged on 19

October 1970. Reply briefs were

exchanged on 19 November 1970.

-29-

DECISION

The Court of Claims has remanded

this case to the Board in order that the

parties may “obtain further fact find-

ings," in accordance with the Court's

opinion “under the applicable guidelines

in published regulations." The issue

raised by the Government's motion is the

narrow one of whether we are required by

the Court's decision to make those

"fact findings" through application of

the ASPR weighted guidelines, or whether

we are required by that decision to

apply the non-weighted guidelines as pro-

posed by the Government. The issue does

not involve an exercise of discretion by

the Board as to which guidelines to

apply, but rather involves a determina-

tion of what the Court has ordered it

to do.

Had the Court not said what appears

in the penultimate paragraph of its

opinion, which is the second of the

three paragraphs quoted in full above,

we would have no doubt that the Court

has required us to determine fair and

reasonable profit through application

of the weighted guidelines to the facts

as stipulated or found in a further

proceeding on the merits. Indeed the

Court said in the first paragraph

quoted in full above that "Plaintiff

desires to take its chances under the

'weighted guidelines method' and it

has a legal right to do so." However,

the Court immediately thereafter said

that:

" . . we see no injustice or

anomaly in applying profit

"=

limitation techniques, as the Penta-

gon may have amended and prescribed

them from time to time, up to the

date of the determination... If

we have erred in thinking the

"Weighted guidelines method' is

feasible to apply to the instant

contracts, the Pentagon even now

could amend or supplement its regu-

lation, and the Boari would be

bound, provided no impairment of

vested rights was attempted."

Appellant would have us ignore the lan-

guage just quoted as inconsequential

dicta. However, the Court's order con-

tained in the final paragraph of its

Opinion does not refer specifically to

the weighted guidelines, but instructs

the Board to make findings "in accord-

ance with its opinion under the appli-

cable guidelines in published regulations."

The penultimate paragraph of the Court's

opinion is a part of the opinion in

which the Court has stated that the Board

under certain conditions would be required

to apply guidelines other than those now

set forth in ASPR 3-808. We accordingly

ar2 obliged to accord that paragraph the

legal effect which it merits.

Appellant does not contend that the

non-weighted guidelines are not "“pub-

lished guidelines" in the sense meant by

the Court. However, appellant contends

that the Board should not consider itself

"bound" to give effect to the actions of

the ASPR Committee on the ground that

those actions did not amount to an "amend-

ment" or "supplement" to the weighted

guidelines by the "Pentagon." Appellant

further contends that even if the ASPR

ee ee ee

-31-

Committee's actions do amount to such an

amendment or supplement, the app} ication

of the non-weighted guidelines to the

“instant contracts" would deprive appel-

lant of a "vested right."

In using the term "Pentagon" we

think that the Court was referring to

those Department of Defense officials

authorized to establish or modify provi-

sions of the Armed Services Procurement

Regulations. DOD Instruction No. 5126.3

dated 20 December 1961, which prescribes

the compesition, functions and authority

of the ASPR Committee provides, in Para-

graph 825.50 that:

"A. With respect to matters, other

than major policy matters, as to

which the members are in accord,

action of the Committee shall be

considered as having the final

approval of the Military Depart-

ments and the Defence Supply

Agency without further review by

them . . «+ «”

Similarly, ASPR 1-109.3, applicable to

"Deviations Affecting More than One

Contract or Contractor" provides in

part that:

" . . deviations from this Regu-

lation or a Department of Defense

Directive will not be effected

unless approved in advance by the

Assistant Secretary of Defense

(Installations and Logistics) ;

provided, however, that unanimous

approval by the members of the

ASPR Committee will constitute

approval of the Assistant

a

=-32-

Secretary of Defence (installations

and Logistics) of all matters except

those involving major policy ..--: -

In ASPR 1-109.1, one type of deviation is

described as follows:

"“(yii) when a policy, procedure,

method or practice of conducting

procurement actions of any kind at

any stage of the procurement

process is covered by ASPR, any

policy, procedure, method or prac~-

tice which is inconsistent with

that set forth constitutes a devia-

efoms « & 6”

Moreover, ASPR 3-808.2(b) provides for

exceptions to applicability of the

weighted guidelines. Although ship con-

struction contracts containing the

escalation clause are not listed among

the specific exceptions in subparagraph

(b) (1), subparagraph (b) (2) provides

that:

"Other exceptions may also be made

in the negotiation of contracts

presenting unusual pricing situa-

tions when specifically authorized

by the Head of a Procuring Activity.

Such exceptions shall be justified

in writing and authorized only in

situations where the weighted

guidelines method is determined

to be unsuitable."

We think that the ASPR Committee

possessed ample authority, pursuant to

the above regulatory provisions, to

determine on behalf of "the Pentagon,"

that the weighted guidelines are not

a ee

=33-

"feasible" for application to a retroac-

tive determination of fair and reasonable

profit as required by the escalation

clause, and that the non-weighted guide-

lines should be so applied in lieu

thereof. Appellant has suggested that

such determinations are matters of

"major policy" and that the ASPR Commit-

tee was not empowered to take final

action thereon. However, we are not

aware of any established criteria for

determining what is or is not "major

policy" for the purposes of ASPR Com-

mittee action. Such determinations are

within the purview of policy making

officials of the Department of Defense,

not this Board.

Appellant has also challenged the

propriety of the ASPR Committee actions

on the basis of what appellant regards

as procedural irregularities. Appellant

points to the ex parte nature of the

proceeding, a Feeling on the part of the

appellant that the Committee members

lacked sufficient information to arrive

at a considered decision, and the speed

with which the action was taken. How-

ever, we are not aware of any provision

of law that prohibits ASPR Committee

action on matters brought to its atten-

tion ex parte by a procuring agency.

The adequacy of the information presented

to the Committee, and the speed with

which it reached its decision are matters

within the discretion of the Committee.

Appellant has endeavored to demon-

strate to the Board that the weighted

guidelines are in fact feasible to apply

to the “instant contracts." In a proper

case we might so determine. Norair

-34-

Engineering Corporation, ASBCA No. 10856,

67-2 BCA par. 19. However, the Court

of Claims has left such a determination

to "the Pentagon" as distinguished from

the Board. We are obliged to observe

this distinction in the absence of evi-

dence that the ASPR Committee has acted

arbitrarily in making its determinations.

In this regard, appellant apparently

contends that the ASPR Committee ignored

a definition of "feasible" as including

what is "possible" or "practicable" or

"capable of being done." However, the

same dictionary also defines the word

"feasible" as including what is "suit-

able" or "reasonable." (Webster's New

International Dictionary, Second Ed.,

p. 926.) It is clear that the ASPR

Committee had the latter meaning in mind

when it determined that the weighted

guidelines were not feasible "since

they . . . were intended for the develop-

ment of a profit objective for negotia-

tion of future contracts." Even if it

were indeed "possible" or "practicable"

to apply the weighted guidelines, we do

not regard the Court as having used

"feasible" in the narrow sense proposed

by appellant. And we do not regard the

grounds cited by the ASPR Committee for

its actions as unreasonable.

Appellant has further contended

that the action of the ASPR Committee is

an attempt to overrule the decision of

the Court. In making this contention,

appellant assumes that the Court has

determined that the Board is obligated

to apply the weighted guidelines as

distinguished from any other guidelines

for the purpose of determining the

profit to which appellant is entitled.

EO

-35-

As indicated above, we do not read the

Court's opinion in that manner. The

Court was essentially determining how,

in its opinion, the Board erred in arriv-

ing at its initial result. In effect the

Court was telling the Board that it must

apply the weighted guidelines unless

"the Pentagon" were to determine that

the weighted guidelines are not feasible

and appropriately amends or supplements

its regulations without depriving appel-

lant of “vested rights." If “the Penta-

gon" were to acomplish such actions, the

Board would be "bound" to apply the

amended or supplemented regulations. It

might be contended that the ASPR Commit-

tee went beyond an "amendment" or "sup-

plement" when it determined that the

non-weighted guidelines should be made

applicable to determining profit under

contracts of the kind involved here.

However, from a reading of the last

sentence of the penultimate paragraph of

the Court's opinion, it is apparent that

the Court was not particularly concerned

with how one might characterize the

action taken by "the Pentagon,” but was

insistent upon the applicability of

"published guidelines" to the resolu-

tion of this controversy. From its

consideration of the Newport News casr,

the Court was well aware of the non-

weighted guidelines. And in its motion

for summary judgment, the plaintiff

(Bethlehem) further called the Court's

attention to the non-weighted guidelines

as well as to the weighted guidelines.

In this connection it is noteworthy that

in none of the papers which it filed

with the Court did Bethlehem specifi-

cally ask the Court to order application

of the weighted guidelines, as distin-

-36-

tinguished from any other guidelines which

Department of Defense officials might

regard as more suitable.

Appellant's final principal conten-

tion is that if we give effect to the

action of the ASPR Committee we would be

depriving appellant of a vested right, a

consequence not permitted by the Court.

Appellant is saying in effect that it has

a vested right to application of the

weighted guidelines. Both parties have

cited a variety of cases which bear on

the question of what might be character-

ized as a “vested” right in circum-

stances not analogous to the present con-

troversy, e.g., Greene v.- United States,

376 U.S. 149 (1964); Thorpe v. Housin

268 T1369) .

Authority of Durham, U.S.

The contracts involved in these appeals

do not provide for the calculation of

fair and reasonable profit in accordance

with the weighted guidelines or any

other ASPR profit guidelines. Appel-

lant's entitlement to the application of

"guidelines" springs from the direction

of the Court of Claims in remanding this

matter to the Board. In Lockheed Air-

craft Corporation v. The United States,

Ct. Cl. No. 46-65 (Decided May 15, 1970),

the Court characterized the ASPR profit

guidelines discussed by it in Newport

News and Bethlehem as ". . . changes in

procedural requirements and standards

during the determination of a claimant's

substantive rights." (Slip Op. P- 9;

emphasis by the Court)

Appellant correctly points out that

in Lockheed, the Court characterized its

Newport News and Bethlehem decisions as

favorabie to, or for the benefit of the

ale ee oUt eS Ne

Pe ee etal

o37~=

claimant. (See p. 9, text and footnotes

7 and 9) Appellant contends that unless

the weighted guidelines are applied it

would be deprived of the profit to which

it believes itself entitled. However,

there is no indication that in Lockheed,

the Court was referring to the applica-

tion of one set of ASPR profit guide-

lines as distinguished from another.

In Bethlehem, the Court expressed its

awareness that the profit to which appel-

lant might be found entitled on applica-

tion of even the weighted guidelines

could be less than the profit originally

determined by the Board. What was

“favyorable" to appellant in the Bethlehem

decision was the Court's determination

that "guidelines" must be appiied- to

determining profit, as distinguished

from no guidelines at all.

In considering the "feasibility" of

the weighted guidelines the ASPR Commit-

tee stated that they "effected a sub-

stantive change in the standards exist-

ing at the time the contracts were

entered into... ." (Emphasis supplied)

However, we have no basis to conclude

that the ASPR Committee was attempting

to dictate the ultimate result which the

Board might reach in further proceedings

on the merits. As stated previously,

the Court left the determination of

feasible standards to the authorized

Department of Defense policy makers.

Appellant points to indications that the

actions of the ASPR Committee were spe~

cifically intended for application to

the Board's resolution of these appeals,

even though contracts not involved here

were also considered. But such specific

applicability was foreseen by the Court

-38- 39

when it referred to the possible infeas-

ibility of applying the weighted guide-

lines to the “instant contracts." The

non-weighted guidelines are published

guidelines of general applicability prior

to 1964. They were regarded by the Court

as acceptable for resolution of the

Newport News controversy. The Court did

not determine that appellant was entitled

to any particular profit, and we accord-

ingly do not regard the application of

this interlocutory ruling. If appellant

does not intend promptly to make such

application, the Board will issue instruc-

, tions to the parties regarding further

proceedings on the merits of these

remanded appeals.

et DAP Ode wierd

Dated 23 December 1970.

the non-weighted guidelines to resolu- : Daniel M. Arons

tion of the instant controversy as impair- DANIEL M. ARONS

ing appellant's vested rights in the Member of Division No. 5

sense meant by the Court. Armed Services Board of

Contract Appeals

We conclude that we are bound pursu-

ant to the Court's directive, as imple-

mented by the ASPR Committee, to apply I Concur I Concur

the non-weighted guidelines, and not the anne

weighted guidelines, in determining the = Lee Bird William J. Ruberry

profit to which appellant may be entitled. Ra od —_ WILLIAM J. RUBERRY

Appellant has contended that such a +" Division No. 5 Member of Division No. 5

course of action would be improper for pe wes yo Board of Armed Services Board of

a number of reasons. We have consid- ontract Appeals Contract Appeals

“

ered appellant's objections in the con I Concur I Concur

text of determining the manner in which

the Court has directed us to proceed.

In opposing the Government's Motion Richard C. Solidakke

appellant has in large part taken issue Harris J. Andrews, Jr.

with the propriety of the course of RICHARD C. SOLIDAKKE, HARRIS J. ANDREWS , Jr.,

Chairman Vice Chairman

action suggested in the penultimate Armed Services Board of Armed Services Board of

aragraph of the Court's o imion. Our

paragrap P Contract Appeals and Contract Appeals and

decision herein would, of course, be

subject to change upon order or clari-

fication rendered by the Court.

Member of Division No. 5 Member of Division No. 5

For the foregoing reasons the Govern-

ment's Motion is granted. Appellant is

ordered to inform the Board within 30

days as to whether it intends to make

application to the Court for review of

-40-

I certify that the foregoing is a

true copy of the opinion and decision

by the Armed Services Board of Contract

Appeals in ASBCA Nos. 10316 and 10317

(Reinstated), appeals of Bethlehem Steel

Corporation, rendered in conformance

with the Board's Charter.

Dated: 13 January 1971.

George L. Hawkes

GEORGE L. HAWKES, Recorder

Armed Services Board of

Contract Appeals

o4le

°

IN THE UNITED STATES COURT OF APPEALS

BETHLEHEM STEEL CORPORATION

Vv.

THE UNITED STATES

Before LARAMORE, Acting Chief Judge,

DURFEE, DAVIS, COLLINS, SKELTON and

NICHOLS, Judges.

ORDER

This case comes before the court on

plaintiff's motion, filed May 10, 1971, for

an order terminating stay and for other

relief. Upon consideration thereof,

together with the opposition thereto,

without oral argument,

IT IS ORDERED that plaintiff's said

motion for an order terminating stay and

for other relief be and the same is denied.

BY THE COURT

JUDGE LARAMORE

Acting Chief Judge

JUL -1 1971

-42-

ARMED SERVICES BOARD OF CONTRACT APPEALS

Appeals of --

)

)

Bethlehem Steel Corporation ) ASBCA Nos. 10316

) and 10317

Under Contract Nos. NObs-3556)

and NObs-3648)

(Reinstated)

APPEARANCES FOR THE APPELLANT:

E. J. O'Brien, Esq.,

Assistant General Counsel

Bethlehem Steel Corporation

Of Counsel:

George Vradenburg, III, Esq.

New York, New York

APPEARANCES FOR THE GOVERNMENT:

Samuel Pinn, Jr., Esq.

Counsel for the Naval Ship

Systems Command

Morris Amchan, Esq.

Assistant Counsel

OPINION BY MR. ARONS

History of the Dispute.

These appeals have been reinstated

following the decision of the United States

Court of Claims in Bethlehem Steel Corpora-

tion v. United States, 191 Ct. Cl. I41

(1970), in which the Court held that the

Board, when it initially decided these

appeals, erred in failing to consider the

provisions of the Armed Services Procure-

-43-

ment Regulation (ASPR) which the Court regarded

as applicable to resolving the matters in dis-

pute. In these appeals appellant seeks to

recover the amount of labor and material cost

escalation said to be due pursuant to Article

6 of the Special Provisions of the above

contracts, under which appellant built five

destroyers for the Navy at its shipyard

located in Quincy, Massachusetts. (Appellant

is sometimes referred to herein as "Quincy.")

Under Article 6(f) of the Special Provisions

appellant warranted that its price proposals

and other data submitted in connection with

negotiation of the contract,

". . . exclude any allowance for con-

tingencies to cover the possibility of

increased costs of performance for which

provision for price adjustment is made

in this Article."

In exchange for this warranty, other para-

graphs of Article 6 provided for adjustment

in the contract price to take account of

inflation in labor and material costs during

performance. However paragraph (e) of that

Article further provided,

"(e) The Contracting Officer may

deny, in whole or in part, any upward

adjustment in the contract price

required under this Article if the Con-

tracting Officer finds that such adjust-

ment is not required, in whole or in

part, to enable the Contractor to earn

a fair and reasonable profit under this

contract,"

Delivery of the last of the five ships

was accomplished in February 1958. On

5 January 1960 appellant submitted its formal

Claims for accrued labor and material escala-

tion, computed in accordance with the formula

-44-

specified in Article 6. Under NObs-3556 appel-

lant claimed a total of $3,347,500. Under

NObs~-3648 appellant claimed a total of

$2,404,900. Without escalation appellant had

earned profits of 3.0% under NObs-355€, which

covered three vessels, and 2.35% under NObs-

3648, which covered two vessels, computed as

percentages of cost. With full escalation

appellant would recover profits of 9.3% under

NObs-3556 and 9.6% under NObs-3648, computed

as percentages of cost.

In final decisions, both dated 18

August 1964, the contracting officer denied

appellant's escalation claims, after deter-

mining, pursuant to Article 6(e), that no

upward adjustment in the contract prices on

account of labor and material escalation was

required to enable appellant to earn a fair

and reasonable profit under either contract.

In making his determinations the contracting

officer excluded from the cost based used in

computing the profit percentages certain

costs which he did not consider allowable

under the contracts. By virtue of these

exclusions the contracting officer determined

that appellant had earned, without escalation,

a profit of 4.6% of contract costs under

NObs-3556, and a profit of 5.0% of contract

costs under NObs-3648.

Appellant then appealed to this Board

pursuant to the Disputes clause in both con-

tracts. In a decision dated 16 June 1966

(66-1 BCA par. 5639) the Board sustained

the appeals in part. It determined that the

contracting officer's cost disallowances were

improper, and that appellant was entitled to

escalation sufficient to enable it to earn a

profit of 5.0% of costs under both contracts,

with the cost amounts previously disallowed

included in the cost base. Under the Board's

-45-

decision, appellant was allowed to retain a

$1,000,000 partial escalation payment

($500,000 under each contract) which the

contracting officer had approved in December

1959. Appellant was allowed a further

$564,151 under NObs-3556 and $376,028 under

NObs-3648. Appellant was thus allowed total

escalation of $1,064,151 under NObs-3556 and

$876,028 under NObs-3648. ©

Appellant then brought an action in

the Court of Claims seeking to recover the

balance of the escalation claimed. In its

decision, dated 20 March 1970, the Court did

not allow any further escalation. However,

it followed the precedent which it set in

Newport News Shipbuseis & Dry Dock Co. v.

Unite tates, ae om C1967); a case

involving the same Article 6(e), and held

that in determining a fair and reasonable

profit under appellant's contract, the Board

erred as a matter of law in not resorting to

profit determination techniques or guidelines

prescribed by applicable published regula-

tions. In the original proceeding before

this Board, neither party relied on profit

guidelines prexucribed in ASPR or elsewhere,

and the Board did not specifically consider

any regulatory guidelines in determining the

profit to which appellant was entitled. No

such guidelines were in effect in 1954, when

NObs-3556 and -3648 were awarded. However,

the Court decided, as it did in Newport News,

that a proper determination of fair and

reasonable profit required consideration of

the applicable profit guidelines and sus-

pended proceedings to enable the parties to

obtain further fact findings in accordance

with its opinion. The appeals were thereupon

reinstated by this Board.

After the appeals were reinstated the

parties engaged in a preliminary controversy

-46-

over which set of ASPR profit guidelines

should be applied in deciding the appeals

on their merits. On the basis of certain

language in the Court of Claims' decision,

appeliant contended that the Court of Claims

required application of the so-called

"Weighted Guidelines" set forth in ASPR

Section 3-808 effective 15 August 1963. The

Government maintained that the Court did not

require use of the Weighted Guidelines,

but instead, allowed Department of Defense

policy makers to establish the applicability

of other guidelines if the Weighted Guide-

lines were not considered feasible for reso-

lution of this dispute, provided that no

impairment of vested rights was attempted.

In June 1970, the authoriZed Department of

Defense policy making body, the ASPR Com-

mittee, determined that the so-called "non-

weighted guidelines," set forth in ASPR

Section 3-808 effective January 1960 should

be considered applicable. The application

of the non-weighted guidelines had been

required by the Court for resolution of

the Newport News litigation. The Government

accordingly urged that the non-weighted

guidelines should similarly be applied for

disposition of the present appeals. For

the reasons stated in our decision on the

guidelines controversy, dated 23 December

1970 (71-1 BCA par. 8640), we agreed with

the Government.

Appellant then filed a motion in the

Court of Claims seeking termination of the

suspension of proceedings and other relief.

Appellant contended that the Board's decision

on the guidelines controversy was erroneous.

In an unpublished order dated 1 July 1971,

the Court denied appellant's motion without

stating any view as to which set of guide-

lines should be applied in deciding these

appeals on their merits. Our disposition

Ee

a

=

-47-

of these appeals herein is accordingly gov-

erned by application of the non-weighted

guidelines to the relevant facts. By agree-

ment of the parties the specific text of the

guidelines under consideration is that which

appeared in ASPR Section 3-808 as of November

1962.

With the permission of the Board,

appellant submitted for the record an offer

of proof as to profit it considers itself

entitled under application of the weighted

guidelines. Appellant's offer of proof is

not in evidence. With respect to appellant's

insistemuce upon application of the weighted

guidelines we note the memorandum dated 13

June 1963 by the Assistant Secretary of

Defense for Installations and Logistics

which indicated that the substitution of

the weighted for the non-weighted guidelines

was intended to quantify existing policy but

not to introduce any drastic changes. That

memorandum was quoted from extensively in our

decision in Newport News Shipbuilding & Dr

Dock Company, ASBCA No. 6565 (Reinstated) ,

-l BCA par. 8705, the decision on the

Newport News appeal which followed the

decision of the Court of Claims in Newport

News Shipbuilding and Dry Dock Company v.

United States, supra.

To a considerable extent the facts

relevant to deciding these appeals have

already been recited in the Board's original

decision and in the opinion of the Court of

Claims. In the original proceeding before

this Board no evidentiary hearing was held;

but the parties executed a lengthy stipula-

tion of facts which was reproduced in toto

in the Board's decision. Several exhibits

were attached to the stipulation. After the

appeals were reinstated, and following reso-

lution of the guidelines controversy, a

-48-

seven-day evidentiary hearing was held and

numerous additional documents, obtained through

mutual discovery, were submitted for the record.

The record now consists of the materials orig-

inally before the Board, which were also before

the Court, supplemented by the hearing tran-

script ana additional documents submitted fol-

lowing reinstatement of the appeals.

At the hearing in the reinstated appeals |

the Government stated that in its view the :

amount of escalation allowed by the Board in

its original decision resulted in a profit to

appellant which was within a fair and reason- '

able range upon application of the non-weighted

guidelines. Accordingly the Government does

not now contend that the amount of escalation

previously allowed by the Board should be

reduced. (Tr. 1-111, 2-7; Govt. Brief, p. 8)

The amount now in dispute is thus determined

as follows:

NObs- 3556 NObs-3648

(ASBCA No. (ASBCA No.

10316) 10317)

Accrued escalation $3,347,000 $2,405,000

Escalation allowed

per Board's

original decision 1,064,151 876,028

Difference now

claimed $2,282,849 $1,528,972

Total claimed .....-. oceeee cooce SSebaneeen

The Guidelines.

Ae A) ee wal

ASPR Section 3-808, entitled "Profit

or Fee," in effect as of November 1962,

included nine individual guidelines. They

-49-

were prefaced by the following introductory

paragraphs:

"3-808.1 General. A fair and rea-

sonable provision for profit or fee

cannot be made by simply applying a

certain predetermined percentage to

the cost estimate or selling price of

a product. Rather, the profit or fee

should be first established as a dollar

amount, after considering the factors

set forth in this 3-808. Therefore,

where a fee is involved and it is neces-

sary to determine the percentage rela-

tionship between the fee and the esti-

mated cost of the contract in order to

comply with administrative and statutory

limitations on fees for cost--reimburse-

ment type contracts, the percentage shall

be determined only after the dollar

amount of the fee has been established

for negotiation purposes.

"3-808.2 Factors for Determinin

Fee or Profit. The factors set forth

in subparagraphs (a) through (i) below

should be considered in determining

profit or fee in all contracts, whether

for supplies or services; for construc-

tion work; or for experimental, develop-

mental, or research work, and whether of

the fixed-price type or of the cost-

reimbursement type unless otherwise

specified in the particular factor.

All of the following factors, as set

forth in (a) through (i) below should

be evaluated in the light of the basic

policy set forth in 3-801.1 which pro-

vides that supplies and services shall

be procured from responsible sources

at fair and reasonable prices calcu-

late@ to result in the lowest overall

cost to the Government:

* * *

-50-

We now turn to consideration of the individ-

ual guidelines, as applied to the relevant

facts. The order of the following discussion

reflects the order in which the guidelines

are set forth in ASPR Section 3-808.

Factor (a) - Effect of Competition.

This factor is stated as follows:

"When competition is effective and

proposals are on a firm fixed-price

basis, the contracting officer normally

need not consider in detail the amount

of estimated profit included in a price.

When effective competition is lacking,

and in ali cases where cost analysis is

performed in accordance with 3-807.2(c)

the estimate for profit, target profit

or fee, or the proposed fixed fee

should be analyzed in the same manner

as all other elements of price, eval-

uating the factors set forth in this

paragraph 3-808." 1/

The DD 931 Program.

The destroyers built by appellant

under NObs-3556 and NObs-3648 were five

of eighteen destroyers in the DD 931 class.

Table I which follows indicates the pattern

in which contracts were awarded for ships

within that class:

1/ ASPR 3-807.2(c) prescribes techniques

for performing a cost analysis. Neither

party has relied on this subparagraph and

we do not consider it material to the dis-

position of these appeals.

:

Ne ee

TABLE I

Date of Award

Contract Number

Contractor

Ship (Hull No.)*

15 December 1952

NObds-3371

RObs-3556

NObs -3615

Bath Iron Works

DD 931, 932, 933

DD 936, 937, 938

DD 940, 941, She

3 February 1954

Bethlehem Steel Corp.

1954

30 July

Bath Iron Works

-5l1-

tr wo

gq

si:

2 8

3%

p

S

% x

i 5

L i.

S$ 3

x a

5

a3

i

A &

27 January 1956

27 January 1956

NOds -3761

Ingalls Shipbuilding

DD 948, 9h9

NObs-3762

Puget Sound Bridge and

DD 950, 951

Dredging Co.

* No contracts were awarded for hull mumbers 934-5 and 939.

@82-

Preparation of Proposal.

As indicated by Table I, NObs-3556

required appellant to build the DD 936, DD

937 and DD 938 which constituted the second

group of three ships in the DD 931 class.

The requests for proposals ultimately

leading to award of NObs-3556 were issued

by the Navy Bureau of Ships on 21 October

1953 and 15 January 1954. Eight shipyards

were invited to submit proposals. Of those

eight, the following yards submitted pro-

posals in the amounts indicated (rounded

off to the nearest $1000):

TABLE II

Bath Iron Works $15,492,000 each of thre 4s

Newport News 16,800,000 " S "

Bethlehem-Quincy 18,674,000 " " "

New York Shipbuilding 19,234,000 " " "

These amounts did not include contingencies

for inflation. (Exh. A-2) Appellant also

submitted an alternative proposal in the

amount of $15,559,000 per ship conditioned

upon award to it of a contract for the air-

craft carrier CVA-61. The contract for the

CVA-61 was awarded to Newport News on 3

February 1954, and was the contract out of

which the Newport News litigation arose.

Appellant considered its proposal for the

CVA-61 high and noncompetitive since a

carrier of that size could not be entirely

built within the confines of the Quincy

yard. (Tr. 2 - 59-69%) Appellant's alter-

native proposal for the DD 936-8 was not

considered by the Bureau of Ships.

At the time proposals were submitted

-53-

with respect to the DD 936-8, the prospects

for future orders placed with American ship-

yards were considered bleak. (Exh. A-7) As

a result of this business outlook the com-

petition for available orders was intensi-

fied. (Tr. 2-19, 2 - 49-50) When appellant

prepared its proposal it was aware of the

workloads in other yards. Most signficantly

it was aware that Bath Iron Works (hereafter

"Bath") had been awarded NObs-3371, the con-

tract which covered theDD 931-3. In appel-

lant's view Bath had a considerable competi-

tive advantage in bidding on the DD 936-8 by

virtue of its experience under NObs-3371

involving similar ships.

Bath had submitted the low proposal

for the DD 931-3 and was awarded NObs-3371

on 15 December 1952 at a price of $15,425,000

per ship subject to escalation and excluding

the cost of design work. As the "lead yard"

for the DD 931 class of ships Bath, in pre-

paring its DD 936-8 proposal, did not have

to include the cost of jigs, fixtures,

scaffolding, etc. acquired for performance

under NObs-3371 and which could be reused

in constructing the DD 936-8. Furthermore

in performing under NObs-3371, Bath's labor

force acquired certain skills in construct-

ing the first three DD 931 class ships

which could be readily employed in the con-

struction of follow-on ships within the

same class. Bath thus had the advantage

of a "learning curve" effect in preparing

its proposal for the DD 936-8. (Tr. 1-53,

3 - 120-3) Furthermore delivery of the first

of the three NObs-3371 vessels was not

required until 1 November 1955. (Exh. G-6)

Appellant was thus aware that in computing

a per ship price for the DD 936-8, Bath was

able to take its work under NObs-3371 into

account in allocating fixed overhead.

Appellant was similarly aware that Newport

-54-

News, another of its competitors, would

most probably receive award of the con-

tract for the CVA-61, which would permit

a lower per ship overhead allocation by

Newport News in computing its price for

the DD 936-8.

In contrast with Bath and Newport

News, appellant's workload was rapidly

dropping off. Delivery of vessels then

on order was to be completed by October

1954. Without new orders, the Quincy

yard would have no shipbuilding work as

of October 1954. Appellant estimated an

irreducible overhead of about ten million

dollars a year for maintaining the Quincy

yard in a state of readiness. (Tr. 1-23)

Construction of the DD 936-8 would take

up approximately five percent of the

capacity of the Quincy yard. Appellant

did not anticipate other future business

which might absorb part of the fixed over-

head. Accordingly, in preparing its pro-

posal for the DD 936-8, appellant included

overhead dollars of $4,901,000 per ship,

or 107% of direct labor. (Exh. A-2) In

contrast, the proposal submitted by Bath

for the DD 936-8 included overhead at 97%

or $2,667,136 per ship (Exh. A-2). Fur-

thermore, the overhead dollars included

in appellant's proposed price for the DD

1936-8 represented only about two-thirds

of the total overhead that would have to

be allocated to the DD 936-8 if no other

business materialized during the construc-

tion period. In an effort to be competitive,

appellant included in its proposed price

overhead for only the first 27 months of

an anticipated 38-month construction

period. (Tr. 1-22, 24; ASBCA No. 10316,

Rule 4, Tab 2) From the evidence presented

we find that the disparity between the

Bath and Quincy prices for the DD 936-8

Se eee ed

@8S8e

was principally attributable to the compara~

tively large amount of overhead which appel-

lant considered as having to be absorbed by

the construction of the DD 936-8. We fur-

ther find that appellant's proposed price

was competitive in the sense that its

preparation took into account appellant's

dire need for new business, the lead yard

advantage gained by Bath under NObs-3371,

and the relatively favorable overhead pro-

jections prevailing for Bath and Newport

News.

Award of NObs-3556.

During the negotiations which fol-

lowed the submission of its proposal for

the DD 936-8, appellant informed the Navy

representatives that due to the absence

of orders for future ship construction,

the closing of the Quincy yard was imminent.

The Navy representatives offered to award

appellant the contract if appellant were

to reduce its proposed price by one million

dollars per ship. Appellant agreed to the

concession and was awarded the contract at

a price of $17,674,000 per ship. At this

price appellant's estimated profit was

$698,000 or about 3.7% of cost. (Exh.

A-2) In appellant's view it was con-

fronted with the choice of accepting the

award on the terms offered by the Navy or

closing the Quincy yard. (Tr. 1-34)

Even with the price reduction, the Navy

agreed to pay appellant, under the con-

tract, a price for the three ships which

was $6,546,000 greater than the price

proposed by Bath. From the evidence pre-

sented we find that during the negotiations

there was no specific discussion relating

to the profit, if any, which appellant

might reasonably earn under the contract,

nor was there any specific discussion

-56-

relating to the amount of escalation which

appellant might recover under Article 6.

The basis for the Navy's decision

to award the contract for the DD 936-8 to

appellant was explained in hearings con-

ducted on 26 February, 22 March and 29

March 1954 before the U.S. House of Repre-

sentatives, Committee on Armed Services,

Subcommittee on Defense Activities. Navy

representatives who testified at those

hearings included Mr. Robert B. Anderson,

then Secretary of the Navy, and Rear Admiral

Wilson D. Leggett, Jr., then Chief, Bureau

of Ships. On the basis of their testimony

we find that the Navy awarded NObs=3556 to

appellant in order to assure the continued

operation of the Quincy yard as a part of

the mobilization base for ship construction.

In making this decision, the Navy recognized

that appellant's Central Technical Depart~-

ment, located at the Quincy yard, included

personnel experienced in ship design and

construction, the dissipation of which would

be detrimental to the national security.

The maintenance of the Central Technical

Department contributed in some measure to

appellant's overhead disadvantage vis-a-bis

Bath. (Tr. 5-12; 13; Exh. A-1l, A-2) The

Navy also recognized that the Bethlehem

yards represented about sixty percent of

the Navy's commercial mobilization poten-

tial for surface combatant types of escort

size vessel and above. In deciding not to

award the contract to Bath, the Navy con-

sidered that as of 1 January 1954, employ-

ment at Bath was rising and that Bath had

work on its books until 1956. Moreover,

in deciding not to award the contract to

Newport News, which had submitted the

second lowest proposal, the Navy took into

account the contemporaneous award of the

carrier CVA-61 (RANGER) to that yard.

@8Jo

In awarding the DD 936-8 contract to appellant

the Navy was adhering to a well-established

policy of allocating ship construction work

to various yards in order to maintain a bal-

anced and widely dispersed mobilization

potential.

Award of NObs-3648.

By letter dated 29 July 1954, the

Bureau of Ships requested appellant to submit

a proposal for the construction of the DD 943

and 944. Appellant submitted a proposal in

the amount of $17,071,500 per ship, about

$600,000 per ship lower than that price

established in NObs-3556. The difference

was attributable to the learning curve

effect on direct labor output which was

anticipated by appellant. (Tr. 2 - 109-10)

For the DD 943 and 944 appellant estimated

1,762,000 labor hours per ship, while NObs-

3556 was based on a labor estimate of

1,903,000 hours per ship. Appellant's pro-

posal included $4,450,000 for overhead, or

104.4% of direct labor. (Exh. A-1) No

other proposals were solicited or submitted

with respect to the DD 943-4. At the time

appellant was invited to submit a proposal

for construction of the DD 943-4, the con-

struction of the DD 940-2 was allocated to

Bath under NObs-3615 at a price of

$15,492,320 per vessel, the price per ship

in the Bath proposal for construction of

the DD 936-8. (Tr. 6-35; Ex. A-11)

In negotiations which followed the

submission of appellant's proposal, Navy

representatives maintained that appellant

had overstated its overhead by failing to

take adequate account of the nearly con-

temporaneous construction of the DD 936-8.

The Navy offered a price of $16,250,000

per ship based upon estimated overhead of

-58-

$3,780,000, or 88.7% of direct labor. (Exh.

A-1) Appellant accepted this offer, and

NObs-3648 was awarded to appellant at that

price. A breakdown of the contract price

shows an estimated profit to appellant of

$698,000 per ship, or 4.5% of cost without

escalation. Although appellant was the

only source solicited for the DD 943-4, its

proposal, and the contract price agreed

upon, reflected the competitive considera-

tions and the need for additional business

which were taken into account in the prep-

aration of its previous DD 936-8 proposal.

However, the award was again made to appel-

lant pursuant to the Navy policy of allo-

cating ship construction work to various

yards.

Award of Contracts for DD 945-51.

The three contracts covering these

seven vessels were all awarded following

a single solicitation. As indicated above

in Table I, NObs-3760, covering the DD 945,

946, and 947, was awarded to Bath. Accord-

ing to a Navy recap of proposals received,

prepared prior to award, the following

prices subject to escalation were proposed

for each of three vessels (Exh. G-10):

TABLE III

Bath $16,280,070

Bethlehem - Quincy 16,440,000

Bethlehem - Staten Island 16,580,000

Bethlehem - San Francisco 16,784,000

Ingalls 16,528,000

Newport News 16,950,000

-59-

According to the Bethlehem - Quincy proposal

dated 28 December 1955 (Exh. A-25), appel-

lant's proposed price subject to escalation

for each of three vessels was $16,047,000.

However, construction of the DD 945-951

entailed some significant revisions to

working plans then being used for construc-

tion of previous DD 931 class vessels. The

Bethlehem - Quincy proposed price did not

include the cost of such plan revisions

which appellant proposed to accomplish as

design agent for all yards receiving awards

for construction of the DD 945-51. Appellant

estimated the cost of design services, includ-

ing fee to be $834,600.

The evidence does not clearly indicate

the reason for the difference between the

ship construction price shown in appellant's

proposal and appellant's price as shown in

the Navy recap. However, the Navy recap was

prepared for the purpose of comparing the

various proposed prices. Under the terms

of the Invitation for Bids, proposed ship

construction prices were to include the cost

of plan work. (Exh. G-20) The internal

Navy memorandum prepared as a basis for

making the award (called a business clearance)

indicates that, for evaluation purposes,

the cost of plan work was added to the pro-

posals submitted by Bethlehem - Staten

Island, and Bethlehem - San Francisco.

(Exh. G-20) On the basis of these adjust-

ments we infer that the Bethlehem - Quincy

price, as shown on the Navy recap, also

includes an adjustment for the cost of plan

work in order to render that price compara-~

ble to the prices submitted by other yards.

Also as indicated in Table I above,

NObs-3761, covering the DD 948 and 949,

was awarded to Ingalls Shipbuilding Corpo-

ration; and NObs-3762, covering the DD 950

-60-

and 951, was awarded to Puget Sound Bridge

and Dredging Company. According to the Navy

recap of proposals received (Exh. G-10), the

following prices subject to escalation were

proposed for each of two vessels:

TABLE IV

Bath Iron Works $17,152,080

Bethlehem - Quincy 16,769,500

Bethlehem - Staten Island 17,377,000

Bethlehem - San Francisco 16,784,000

Ingalls Shipbuilding 16,873,440

Puget Sound 16,800,000

Newport News 17,546,000

The Bethlehem - Quincy proposal (Exh. A-25)

quoted a price of $16,600,000 for each of

two vessels. We again infer that for pur-

poses of evaluation the Navy adjusted the

Bethlehem - Quincy price to take account

of the cost of plan work.

The contract prices subject to

escalation for the DD 945-51 were as follows:

a6j@

(Exh. G-20), we find that in making these

awards, the relative proposed prices were

taken into account, but that the controlling

consideration was the Navy policy of distrib-

uting work among various yards and geographic

locations.

In awarding contracts for the DD 945-

51, the Bethlehem - Quincy proposal was not

considered at all. At the time the Navy

solicited proposals for these destroyers,

it also solicited proposals for two frigates,

DL 7 and 8. Ships in the PL class were

larger and more powerful than the DD 931

class destroyers. (Tr. 3-64, 141) Appellant

submitted the lowest proposal for the DL 7

and 8. Bath already had a letter contract

for the DL 6, but the price proposed by Bath

for the DL 6 was considered to be high.

Accordingly, appellant was requested to

submit a proposal for the DL 6. A compari-

son between the Bath and Quincy proposals

indicated that Bath's proposed price,

including plans for the DL 6, 7 and 8, was

approximately $16,000,000 higher than the

price proposed by Quincy. Accordingly the

letter contract with Bath for the DL 6 was

terminated and appellant was awarded NObs-

3759 for the construction of the DL 6, 7

and 8. In the Navy's view, the award of

this contract to appellant precluded con-

sideration of appellant's DD 945-51 pro-

TABLE V posal. Appellant ultimately suffered a

loss of $3,990,000 under Nobs-3759. (Exh.

NObs-3760 (DD 945, 946, 947)- $16,223,000 per ship A~6; Tr. 4-53)

Escalation Allowed Under Contracts

for DD 931 Class Vessels.

NObs-3761 (DD 948, 949) - $16,225,000 per ship

NObs-3762 (DD 950, 951) - $16,445,000 per ship From the evidence presented we

have constructed the following table

On the basis of the above tabulation of pro~ which indicates the amount of escalation

posals and the business clearance document

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allowed ander each of the contracts for

DD 931 class vessels and the impact of

the escalation allowances on profits

earned under those contracts:

-6§4-

The escalation allowances shown above were

made by the contracting officer under NObs-

3371 (DD 931-3), NObs-3760 (DD 945-7),

NObs-3761 (DD 948-9), and NObs-3762 (DD

950-1). The escalation allowance shown

for Quincy reflects the result of the

Board's original decision in these appeals.

_ Where escalation was allowed by the

contracting officer, the reasons for the

allowance were stated in a business clear-

ance document. The allowance of full

escalatior under NObs-3371 was based in

large measure upon the fact that Bath had

submitted the lowest competitive price.

(Exh. A-l4a) Similarly the allowances of

full escalation under NObs03761 (DD 948-9)

and 3762 (DD 950-1) were justified on the

ground that these contracts were awarded

on the basis of competition. (Exh. A-18,

A-20) The allowance of partial escalation

to Bath under NObs-3760 was also justified

on the ground that the award was obtained

through competition. (Exh. A-16) Escala-

tion was denied under NObs-3615 on the

ground that payment of escalation would

result in an unreasonably high profit to

Bath. (Exh. A-15, G-14) Bath withdrew

its escalation claim under NObs-3615 on

26 August 1960, when it became aware that

partial escalation would be allowed under

NObs-3760 (DD 945-7). Although factors

such as competition, risk and performance

were considered in determining the escala-

tion allowed in 1960 under NObs-3760,

3761 and 3762, there is no evidence that

profit guidelines prescribed by ASPR were

specifically taken into account.

CONCLUSIONS UNDER FACTOR (a)

In our decision on the reinstated

Newport News appeal we found as a fact

— atte deities hia 3b

-65-

that "the award of the RANGER contract was

the result of ‘adequate and effective’ com-

petition." This finding was based in large

part on evidence establishing that the award

was made to Newport News because the differ-

ence between its proposal and the next

higher proposal (that of Bethlehem ~- Quincy)

was approximately $28,000,000. On the

basis of this finding we stated the follow-

ing conclusions as to the application of

Factor (a) (71-1 BCA at 40,453-4):

"Wwe have found that competition in

this instance was adequate and effec-

tive within the meaning of Factor (a),

and are of the opinion that such being

the case, attendant extrinsic condi-

tions, efficiencies or inefficiencies,

and agreed contract conditions such as

the present provisions for escalation,

must be allowed to operate without the

intrusion of judgments of reasonable-

ness based on other considerations.

In short, it is our view that under

Factor (a), what is fair and reason-

able is determined by the consequences

of competition and cannot be redeter-

mined under article 6(e) of the con-

tract. In our view, by operation of

Factor (a), appellant is entitled to

escalation to the full extent permitted

by article 6 of the special provisions."

In Newport News, the Board thus allowed full

escalation through application of Factor (a)

alone, although in an alternative holding

the Board also considered Newport News

entitled to full escalation through applica-

tion of the other eight guidelines.

Appellant contends that the awards

of both NObs-3556 and Nobs-3648 were based

on competition, pointing to the influence

-66-

of competitive factors on the preparation

of its respective proposals. Appellant

says that the competition for the award of

NObs-3556 was more severe than the competi-

tion considered in Newport News. Accord-

ing to appellant, the Court in Newport

Nev.- considered the Bethlehem - Quincy

proposal for the CVA-61 to be competitive

when in reality it was not competitive.

Appellant further notes that competitive

pressure enabled the Navy to insist upon

$1,000,000 per ship discount as a condition

to awarding appellant a contract for the

DD 936-8, which further increased the dis-

parity between appellant's proposal and

estimated costs.

We agree with appellant to the

extent that the prices for the DD 936-8

and 943-4 reflected competitive influences.

However, as indicated by ASPR 3-808.2,

quoted above, Factor (a) must be read in

the light of the basic policy which pro-

vides that supplies and services shall be

procured from responsible sources at fair

and reasonable prices calculated to result

in the lowest overall cost to the Govern~

ment. Had this basic policy been observed,

NObs-3556 would have been awarded to Bath.

Although effective competition was present

in this procurement the overriding basis

for making this award was not the result

of such competition. The award was made

as the result of the Navy's decision to

assure continued existence of appellant

as a part of the mobilization base, and

further pursuant to the Navy's policy of

allocating its ship construction work

among various yards. The award of NObs-

3648 similarly resulted from the Navy's

policy of allocation. Considerations of

price played only a secondary role in

determining the award of these contracts

to appellant. In the case of NObs-3556,

-67-

it is clear that the Government paid con-

siderably more than if the award had been

made strictly as the result of price com-

petition. The circumstances of the

awards to appellant thus differed materi-

ally from the circumstances which we found

in Newport News to justify full escalation

under Factor (a).

Appellant further contends that in

determining whether it is entitled to

additional escalation under Factor (a),

we should take account of the escalation

allowed under other contracts for DD 931

class vessels. Appellant urges particu-

larly that we consider the escalation

allowed under NObs-3760, 3761 and 3762

covering the DD 945-51. Appellant sub-

mits that the escalation under those con-

tracts was allowed by the Navy on the

ground that the awards were obtained by

competition, although appellant had sub-

mitted the lowest proposed price. The

most striking comparison to be drawn

is that Bath was allowed sufficient

escalation to enable it to earn a

$6,702,308 profit for three vessels

under NObs-3760, whereas appellant, with

the escalation allowed by the Board,

earned a $2,160,230 profit for three

vessels under NObs-3556. Appellant

insists that if the award of NObs-3760,

3761 and 3762 were based on competition,

the relatively low escalation allowed

appellant under NObs-3556 and 3648

amounts to an unfair discrimination.

We have doubts as to the relevancy

of appellant's reliance upon the escala-

tion allowed under NObs-3760, 3761 and

3762 to the aplication of Factor (a) in

the present appeals. Factor (a) is

addressed to the extent of competition

-68-

prevailing in an individual procurement,

not to competition which might prevail in

future procurements. Furthermore, Factor

(a), along with the other factors, are

couched in terms of considerations to be

taken into account by a Government nego~

tiator when negotiating an individual

contract. As stated in ASPR 3-807.8,

in effect as of 26 November 1962, "Each

contract shall be priced separately and

independently, and no consideration shall

be given to losses or profits realized or

anticipated in the performance of other

contracts.”

Even if the extent of competition

which prevailed in the award of NObs-3760,

3761 and 3762 is relevant to the applica-

tion of Factor (a) in these appeals, the

facts do not support appellant's conten-

tion that the Navy has unfairly discrim-

inated against it. The Navy's decision

to award the contracts for three vessels

to Bath, two vessels to Ingalls, and two

vessels to Puget Sound, with appellant

obtaining the award for three DL's,

reflected the Navy's policy of allocation.

However, aS discussed above, appellant

was apparently not the low bidder if the

cost of plan work is taken into account.

Even if the inference which we drew from

the evidence in this regard is erroneous,

the differences between appellant's pro-

posed prices and the prices proposed by

Bath, Ingalls and Puget Sound for the

DD 945-51, indicated in Tables III and IV

above, were small compared with the dis-

parity between appellant's and Bath's

prices for the DD 936-8, even with the

$1,000,000 reduction in the price per

ship reached during appellant's negotia-

tions with the Navy. Appellant's reli-

ance upon the circumstances leading to

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-69-

the award of NObs-3760, 3761 and 3762, and

the escalation eventually allowed there-

under lacks substantial merit.

We conclude that NObs-3556 and 3648

were awarded on the basis of considerations

other than the results of price competition.

In view of the disparity between appel-

lant's proposed price for construction of

the DD 936-8 and the lowest proposed price,

that of Bath, we further conclude that

appellant is not entitled to additional

profit under NObs-3556 on the basis of

Factor (a) alone. Since the award of NObs-

3648 did not involve competition between

various yards, and was based solely on the

Navy's decision to allocate the DD 943-4

to Quincy, appellant is not entitled to

additional profit under NObs-3648 on the

basis of Factor (a) alone. We must

accordingly apply the other guidelines

to the facts relevant thereto in order

to determine whether appellant is entitled

to additional profit.

Factor (b) - Degree of Risk. This

factor is stated as follows:

"(1) The degree of risk assumed

by the contractor should influence

the amount of profit or fee a con-

tractor is entitled to anticipate.

For example, where a portion of the

risk has been shifted to the Govern-

ment through cost-reimbursement or

price redetermination provisions,

unusual contingency provisions, or

other risk-reducing measures, the

amount of profit or fee should be

less than where the contractor

assumes all risk.

"(2) Some cost-plus-a-fixed-fee

contracts and task orders for research

-70-

and development call for the delivery

of prototypes ‘of other 'hardware.'

Other such contracts or task orders

require only that the contractor exert

his ‘best effforts' to deliver the

required end item. Frequently this is

because the contractor is not willing

to assume the additional burden of

incurring substantial cost overruns

without additional fee in order to

complete performance. When the con-

tract calls for delivery of developed

models in accordance with well-defined

performance or design characteristics

or a predetermined delivery schedule,

or both, in contrast to an obligation

only to exert his ‘best efforts' to

develop and deliver such models, pay-

ment of the fee should be conditioned

on performance in accordance with the

contractor's obligation to deliver,

and in such cases the contractor may

be entitled to a larger fee because

of the risk inherent in his commit-

ment and because of the successful

completion of the work."

As stated by the Court of Claims in

Newport News Shipbuilding and Dry Dock Co.

v. United States, supra, this factor is to

be applied prospectively, not with the

benefit of hindsight. Thus we are to exam-

ine the risks assumed by appellant at the

time it was awarded NObs-3556 and NObs-3648

without consideration of whether those

risks eventually materialized.

Non-inclusion of All Anticipated

Overhead Costs in Proposed Price.

As stated above, appellant's pro-

posal for the DD 936-8 included approxi-

mately two-thirds of overhead anticipated

-7l-

for the construction period on the assumption

that no further business would materialize.

Appellant's proposal for the DD 943-4 was

prepared on the same basis. (Tr. 1-22) At

the time appellant prepared its proposals

for the DD 936-8, and DD 943-4 it had no

reason to believe that it would receive sub-

stantial additional orders for ship construc-

tion. Its decision not to include full

anticipated overhead in its proposals .

emanated from its belief that such an omis-

sion was necessary in order for it to be

competitive. Appellant's proposed price

for the DD 936-8 was further reduced by

$1,000,000 per ship during negotiations.

We findthat at the time of award of NObs-

3556 and 3648, appellant assumed more than

the usual risk that anticipated costs would

overrun the contract prices for the five

ships, even allowing for escalation.

Fortunately for appellant, it eventually

obtained orders for tankers from oil com-

panies following the 1956 Suez crisis,

thereby expanding the direct cost base

over which it could distribute its fixed

overhead. (Tr. 3 - 64-8) However, the

eventual mitigation of appellant's risk

of loss under NObs-3556 and 3648 is

irrelevant to our consideration of the

risk which prevailed at the time of award.

Risk of Inadequate Lead Yard Plans.

Article l(c) of the Special Provi-

sions of NObs-3556 provided that:

"(c) The Contractor may, at its

own expense and at its election, obtain,

at the cost of reproduction, copies of

detail working plans, booklets, manuals,

and other plans and data relating to

the construction of Destroyers (DD931)

from Bath Iron Works Corporation, Bath,

=a72<

Maine. The Government does not guarantee,

nor does the Government make any repre-

sentations with respect to, the timeli-

ness of the delivery of such plans,

booklets, manuals, and other daté@ nor

the correctness and accuracy of any

details, dimensions or any other infor-

mation shown on such plans, booklets,

manuals and other data, nor does it

guarantee that such plans, booklets,

manuals and other data include all

plans, booklets, manuals and other data

necessary for the construction of the

vessels."

The comparable clause in NObs-3648 provided

in effect that appellant could use, at its

election, the working plans, etc. relating

to the construction of the DD 936-8. The

clause included similar disclaimers as to

Government responsibility for the accuracy

of the plans, etc.

Under NObs-3371 (Exh. G-6), Bath, as

the lead yard for the DD 931 class of

destroyers, had the responsibility for

preparing detail working plans, manuals,

booklets, etc. However, NObs-3371 further

provided that Bath would enter into an

agreement with Gibbs & Cox, Inc., a highly-

regarded naval architectural firm, for the

preparation of working plans. (Tr. 5-12)

The agreement with Gibbs & Cox was to be on

cost reimbursement basis, with the Navy

reimbursing Bath for the allowable costs

incurred by Gibbs & Cox. NObs-3371 stated

the total estimated cost for performing

such plan work at $6,967,500.00.

At the time appellant submitted its

proposal for the DD 936-8, the working

plans for the DD 931 were about 40 percent

complete. (Tr. 5-39, 126) At the time

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appellant was awarded NObs-3648, for con-

struction of the DD 943-4, the working

plans for the DD 931 were about 85 percent

complete. (Tr. 5 - 41-2) Based on the

testimony of the Government's engineering

witness (Mr. Miller), who served as project

engineer on the DD 931 program between

1957-9, we find that in general, a lead

yard incurs a greater risk than a follow

yard as to the adequacy of plans and work-

ing drawings. (Tr. 5-38) The DD 931 was

in effect a prototype ship, the construc~

tion of which involved extensive engineering

calculation and design work, and the order-

ing of major components which were being

specified for the first time. (Tr. 5-8)

Bath thus incurred the risk that inadequate

lead yard plans might augment its construc-

tion costs in terms of rework and delay.

However, Bath incurred virtually no risk

with respect to the additional costs of

architectural or engineering work neces~

sary to revise inadequate plans or working

drawings.

Appellant's proposal for the DD 936-8

was based on the assumption that the lead

yard plans would be timely and adequate.

(Tr. 2 - 99-100) Appellant's proposal

included an estimate of 96,000 manhours for

engineering. (Tr. 2-111) However, this

estimate substantially represented the

effort involved in reviewing and monitoring

the lead yard plans. (Tr. 2-100) Lead

yard plans can rarely be used by a follow

yard without some adjustments. (Tr. 5-144)

We are unable to find that appellant's pro-

posal for the DD 936-8 included a substan-

tial contingency for inadequate lead yard

plans. For the DD 943-4, appellant esti-

mated 130,000 engineering manhours, with

the increase attributable to appellant's

experience in working with the lead yard

-74-

plans under NObs-3556. (Tr. 2-111)

NObs-3556 did not include any spe~-

cial provision for reimbursement of

appellant's costs with respect to plan work.

Appellant thus assumed the risk, under its

fixed price contract, of both the cost of

plan revisions necessitated by inadequate

lead yard plans and attendant rework and

delay costs. Under Article l(c) of the

Special Provisions, appellant was assured

only of being able to obtain the lead yard

plans as they became available. The Gov~

ernment disclaimed all responsibility for

the timeliness or adequacy of the plans.

That the timeliness and adequacy of lead

yard plans has been a significant problem

to follow yards is evident not only from

the testimony of appellant's witnesses,

but also from a Comptroller General's

Report to Congress dated 28 February 1972

(Exh. A-31). In that report, late and

inaccurate lead yard working plans are

viewed as major sources of shipbuilders'

claims. Aside from the merits of indi-

vidual claims, the Navy has conceded the

significance of the problem.

From the record presented as it

relates to this matter we find that the

risk assumed by appellant under NObs~-3556

with respect to inadequate or untimely

lead yard plans was substantial and roughly

equal to the comparable risk assumed by

Bath under NObs-3371. We base this finding

principally on the non-existence of more

than half of the lead yard plans at the

time appellant submitted its proposal for

the DD 936-8. We also take into account

the risk assumed by appellant as a follow

yard that the Navy Superintendent of Ship-

building at Quincy might have views as to

adequacy of plans different from those of

)

:

=75-

the Superintendent of Shipbuilding at Bath,

Maine. (Tr. 3-126, 5-153) We further find

that appellant's risk under NObs-3648 with

respect to the timeliness or adequacy of

lead yard plans was considerably reduced.

However, its risk under that contract was

still greater than the comparable risk

assumed by Bath, Ingalls, and Puget Sound

under NObs-3760, 3761, and 3762. The DD

931 was delivered in November 1955, prior

to the award of those contracts. The con-

tractor under NObs-3760, 3761 and 3762 had

the benefit of a complete set of working

plans on which corrections or follow-up

actions had been made. They further had

the benefit of knowing the results of the

DD 931 acceptance trials. (Tr. 4 - 110-12,

5 - 40-41)

The DD 945-51 consisted of what Mr.

Miller described as a sub-class of DD 931

class vessels in that the plans and spe-

cifications were reissued by the Bureau of

Ships to include various changes that had

been made. (Tr. 5 - 43-4) To some extent

new working drawings had to be generated,

although the record in these appeals does

not reveal the extent of the changes. We

are unable to find that the need for prep~-

aration of some new working drawings

imposed a risk of plan unavailability or

inadequacy upon the contractors under NObs-

3760, 3761, and 3762 as great as the com-

parable risk imposed upon appellant under

NObs-3556 or 3648.

Effect on Risk of Various Standard

Contract Provisions.

In addition to the effect on risk

of the relative adequacy and availability

of lead yard plans, testimony and argument

has been addressed to the question of

-76-

whether certain provisions of the contract

tended to reduce the risks otherwise

imposed upon appellant. The clauses under

consideration appear to be similar or iden-

tical to the comparable clauses included

in NCbhs-3557, the contract for the CVA-61

(RANGER) awarded to Newport News, the con-

tract under which the Newport News litiga-

tion arose. The effect of these clauses

on a shipbuilder's degree of risk was dis-

cussed extensively in our opinion in the

reinstated Newport News appeal.

The Escalation Clause.

The escalation clause referred to

is Article 6 of the Special Provisions

which has been discussed above. In the

reinstated Newport News appeal we found

that the escalation clause did not, as

of the time of contracting, shift the

entire risk of economic inflation of

labor and material costs from the con-

tractor to the Government. We consid-

ered that subparagraph (e) raised the

specter of a protracted dispute even if

the contractor eventually prevailed in

overcoming an adverse determination under

that clause. We also considered that

Article 6 would not protect the contrac-

tor from actual material or labor cost

increases exceeding the levels stated

in the applicable Department of Labor

Indices. We find, on the basis of testi-

mony presented in the appeals now before

us, that even in the absence of any dis-

pute over escalation, payment of escala-

tion under Article 6 is less prompt due

to procedural delays, than in the case of

a firm fixed price contract where the fixed

price includes contingencies for inflation.

(Tr. 4-13)

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At the time NObs-3556 and 3648 were

awarded, there was no discussion of whether

the escalation clause would adequately pro-

tect appellant from the consequences of

inflation. Appellant assumed that it would

be protected by the applicable formulas.

(Tr. 3-9, 10) Nevertheless the risk of

inadequate protection still existed. Under

subparagraph (d) of Article 6, appellant

could ask the Navy to recognize another

formula if the formula prescribed by the

clause did not produce equitable results.

However, subparagraph (d) imposed the risk

that the Navy could not be so persuaded.

The Government contends that the facts in

the present appeals warrant a different

conclusion from that reached in the rein-

stated Newport News appeal as to the

implications of the escalation clause

on risk. We are unable to find any merit-

orious distinctions in this regard, and

accordingly conclude, as we did in Newport

News, that the escalation clause did not

entirely shift the economic risk of infla-

tion from appellant to the Government.

Changes and Suspension Clauses.

These are Articles 4 and 16, respec-

tively of both NObs-3556 and 3648. Identi-

cal clauses were commented upon in our

opinion on the reinstated Newport News

appeal. 2/ In Ne rt News, we concluded

that atthe time of contract award, the

Changes and Suspension clauses did not

tend to shift any substantial risk inher-

ent in changes and suspensions from

appellant to the Government.

The Government maintains that the

2/ These clauses were quoted in their

entirety in the Appendix to the Board's

decision in the reinstated Newport News

appeal.

-78-

obligation imposed by these clauses upon

the Government to negotiate equitable

adjustments on a "sole source" basis in

effect affords the contractor an improved

remedy as compared with the common law

remedy of bringing an action for breach

of contract. According to the Government

this improved remedy is risk reducing.

This type or argument was considered by

the Board in the reinstated Newport News

appeal where we observed that when these

clauses are read in conjunction with the

standard Disputes clause, the contractor

might lose bargaining power by having to

execute a direction prior to price adjust-

ment. We also observed that if the price

adjustment claimed is contested, the con-

tractor might suffer substantial delay

and expense under the disputes procedure.

Furthermore, as pointed out by appellant,

the power of the Government to issue

change or suspension orders under NObs-

3371 imposed a risk upon appellant as a

follow yard, dependent upon the timeliness

and adequacy of working plans generated by

Bath under NObs-3371. To some degree a

follow yard assumes the risk that changes

will be made in the lead ship with no com-

parable changes in the follow ship,

although the Navy's more common practice

was to direct changes in the follow ships

which were not made applicable to the lead

ships. (Tr. 5 - 140-1)

We conclude that the Changes and

Suspension clauses included in NObs- 3556

and 3648 did not have a risk reducing

effect. If anything, the authority of the

Government to change or suspend the work

performed under NObs-3371 augmented the

risk imposed upon appellant.

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-79=-

Insurance Clause.

Article 9 of the General Provisions

of both NObs-3556 and NObs-3648 was the

standard clause entitled "Insurance -

Property Loss or Damage ~ Liability to

Third Persons." This clause was commented

upon in our decision on the reinstated

Newport News appeal. In that decision we

stated that:

"Since the cost of insurance would

not be a negligible expense if incurred

on a project of this nature and size,

we regard article 9 of the general pro-

visions as tending to reduce the risk

of such costs."

In its most relevant respect the

Insurance clause provided (in subpara-

graph (a) thereof) that, unless otherwise

directed by the Navy, the contractor was

not to procure insurance against loss or

damage to vessels or materials or equip-

ment therein to the extent such risk of

loss or damage would have been assumed

by underwriters under standard marine

builder's risk policies. The Government

in effect became a self-insurer for such

risks.

At the hearing in the appeals before

us the vice-president who headed appellant's

Shipbuilding Division (Mr. Strohmeier)

testified that the Insurance clause adds

to the contractor's risk since a shipbuilder

can make more expeditious settlements with

the commercial insurance industry than

with the Government. He disagreed with

the above quoted statement from our Newport

News opinion, as it might be made applica-

ble to the present appeals, on the ground

-80-

that the magnitude of risks involved in

destroyer construction are readily insur-

able. (Tr. 3-28, 29) Mr. Strohmeier's

testimony was not contradicted.

Notwithstanding Mr. Strohmeier's

comments, the Insurance clause in effect

transferred to the Government risks asso-~

ciated with obtaining insurance in the

commercial market. For example, under

the clause the contractor is not confronted

with the risk of increases in insurance

premiums during the course of construction.

We accordingly find that the Insurance

clause tends to be risk reducing. However,

in view of Mr. Strohmeier's uncontradicted

testimony as to the availability of com-

mercial insurance and comparative experi-

ences in making settlements, we further

find that the Insurance clause has very

little effect on the overall allocation

of risks provided for in NObs-3566 and

NObs-3648.

Limitation on Liability for Defects

in Guaranty Period.

General Provision 6 of both NObs-3556

and 3648 provided in effect that appellant

was liable for correction of defects dis-

covered during the six month guaranty

period following the date of preliminary

acceptance of each vessel. However,

Article 7 of the Special Provisions of

each contract limited appellant's liability.

For the three vessels to be delivered under

NObs-3556 appellant's liability for such

defects was limited to $265,110. For the

two vessels to be delivered under NObs-

3648 appellant's liability was limited to

$162,500. When considering the effect

of similar provisions in the reinstated

Newport News appeal, we concluded for

i

3

4

3

4

:

-8l-

the reasons stated therein, that the limita-

tion on liability had a risk reducing

effect. In the record now before us there

is no basis to distinguish that conclusion.

We accordingly conclude that the limita-

tions on liability provided for in Article

7 of the Special Provisions of NObs- 3556

and 3648 respectively had a risk reducing

effect.

Government-Furnished Property.

The provisions in NObs-3556 and 3648

concerning Government-furnished property

were generally similar to those discussed

in our opinion in the reinstated Newport

News appeal. Article 31 of the General

Provisions was the standard Government~

Furnished Property clause. Article 1(d)

of the Special Provisions required the

Government to furnish the materials listed

on schedules (Schedule A) respectively

attached to each contract. Under Article

8 of the Special Provisions the Navy was

entitled to make changes in the list of

materials.

In the reinstated Newport News

appeal we concluded for the reasons stated

therein that,

"| . the Government-furnished

property arrangements in the contract

did not tend to shift any major risk

from the contractor to the Government

and for present purposes were neutral

in effect, the situation being analo-~

gous to that found. . .- in connection

with the changes and suspension

clauses."

-82-

There is no basis in the record now before :

us to distinguish this statement. Accord- )

ingly we conclude that the Government-

furnished property arrangements in NObs-

3556 and 3648 did not have a risk reducing

effect. 7

CONCLUSIONS UNDER FACTOR (b)

As indicated above, the manner in

which the NObs-3556 price was determined,

and the status of lead yard plans at the

time of award, resulted in the assumption

by appellant of greater than the normal risk

of loss assumed by contractors for DD 931

class vessels. The risk assumed by appel-

lant under NObs-3648 by reason of these

factors was somewhat less, but was still

greater than the norm. We further con-

clude that the various standard clauses

having a possible impact on risk were either

neutral in effect or had only a minimal ;

effect on alleviating appellant's overall

risk of loss. We accordingly determine ;

that considerations under Factor (b) tend

to support an allowance of additional

profit to appellant.

Factor (c) - Nature of Work to be |

Performed. This factor is stated as

follows:

"A major consideration in the deter-

mination of the amount of profit or fee,

particularly in connection with experi-

mental, developmental, or research work,

is the difficulty or complexity of the

work to be performed and any unusual

Gemands of the contract, such as whether

the project involves a new approach

unrelated to existing equipment or only

refinements on existing equipment,

whether the caliber or class of

OTe 6 et ne ne ees Bees nm

-83-

engineer involved is that of an '‘idea-

man,' or whether the contractor is to

be required by the contract to assign

to the work unusually skilled talent."

Again the Court of Claims in Newport News

Shipbuilding and Dry Dock Company v. United

States, supra, indicated that this factor

is to be applied prospectively, i.e., at

the time of award.

Comparisons of DD 931 Class Vessels

with RANGER.

Most of the evidence presented with

respect to this factor involved a comparison

in terms of relative complexity between the

construction of the aircraft carrier RANGER,

and the construction of a DD 931 class

destroyer. In our decision on the reinstated

Newport News appeal we found that ". . . the

work to be anticipated under the RANGER con-

tract was both difficult and complex within

the meaning of Factor (c)."

Appellant's position is that the con-

struction of a DD 931 class destroyer was

more complex than the construction of the

RANGER. In support of this position appel-

lant's witnesses testified that the com-

plexity or difficulty of constructing a

ship is to be measured in terms of compact-

ness or congestion. Although a destroyer

is smaller than a carrier, relatively more

material must be installed, and more activ-

ity performed, in each increment of space.

Appellant's engineering witness (Mr. Mack-

Forlist) testified that because of the size

of the aircraft carrrier, materials can

actually be stored on the ship, which facil-

itates scheduling and control of construc-

tion. Such storage is not possible on the

destroyer. He cited various technical

-84-

factors such as the relatively high ratio

of shaft horsepower to tonnage which, as

compared with the carrier, resulted in an

increase in the complexity of installing

piping and electrical cable in the rela-

tively small space allowed to accommodate

these items. (Tr. 1 - 107-10, 2- 57,9,

3 - 3-8, 3 - 111-12, 4 - 59-63, 4 - 99-109)

The Government's engineering witness

(Mr. Miller) testified that notwithstanding

the compactness and close working areas in

the destroyer, the DD 931 class vessel in

no way approached the overall complexity

of the RANGER from construction or design

standpoints. He did not agree that Mr.

Mack-Forlist's method of evaluation com-

plexity in terms of relative congestion

provided a valid overall analysis. Mr.

Miller testified that the carrier was the

more complex vessel to construct if one

takes account of the comparatively large

number of skilled workmen which had to be

organized and supervised at any one time,

the greater amount of material which had

to be organized into a systematic flow,

the many sophisticated systems on a carrier

which were not required on a destroyer, and

welding difficulties attributable to a type

of steel used in a carrier which was not

used in a destroyer. Mr. Miller further

testified that the DD 931 class vessel was

complex in terms of the quantity of engineer-

ing and the workmanship required to install

various systems, but, such vessels were not

as complex as others. (Tr. 5 - 28-32, 5 -

100-8, 5 - 112-24)

It is apparent that Mr. Mack-Forlist

and Mr. Miller were employing somewhat dif-

ferent criteria for evaluating the relative

complexity of the RANGER on the one hand,

and the DD 931 class vessels on the other.

Pe ee) Oe ee 2

~ DO MAD aL stn, GUNS oo

-85-

On the record presented we are unable to find

that the DD 931 class vessels were more com-

plex than the RANGER. We do find that the

construction of DD 931 class vessels was

difficult and complex within the meaning of

Factor (c).

Comparison with Other DD 931 Class

Vessels.

In considering the impact of Factor (c)

on the disposition of these appeals, we fur-

ther take into account the complexity of

appellant's tasks under NObs-3556 and 3648,

as compared with the complexity of the tasks

confronting other contractors who undertook

to construct DD 931 class vessels. It is

noteworthy in this regard that the Navy

allowed full escalation to Puget Sound under

NObs-3762 partly on the ground that the work

was considered complex. In view of the status

of the DD 931 as a prototype ship, involving

the installation of systems never previously

employed, .we find that the work performed

by Bath under NObs-339] was relatively more

complex, within the meaning of Factor (c)

than the work performed by appellant under

NObs-3556 and 3648. In making this finding

we do not overlook the specific exclusion

from NObs-3371 of four items of work which

were not similarly excluded from appellant's

contracts. (Exh. G-6; Tr. 3 - 133-4, 3 -

143-4) We further find that the work per-

formed by Bath, Ingalls and Puget Sound under

NObs-3615, 3760, 3761 and 3762 was not more

complex than that performed by appellant.

Under Factor (c) an evaluation of relative

difficulty or complexity involves consider-

ation of new technical approaches or unusual

technical problems. At the time of award of

NObs-3556, the only prior experience avail-

able to appellant with respect to unusual

technical problems affecting DD 931 class

-86-

vessels was Bath's partial experience in per-

forming under NObs-3371. From this stand-

point, the complexity of the task confronting

appellant in performing under NObs-3556 was

greater than that confronting the contractors

under later contracts, including appellant

under NObs-3648.

CONCLUSIONS UNDER FACTOR (c)

The Government contends that Factor

(c) does not operate in appellant's favor

on the ground that as compared with the

RANGER, or the DD 931, the vessels constructed

by appellant did not involve experimental,

developmental or research work, unusual ;

demands, or a new approach unrelated to exist-

ing equipment. The Government had in effect

espoused the position taken by its procure-

ment specialist (Mr. Markowich) who, on the

basis of his experience with shipbuilding

contracts, testified that in his opinion

the relative complexity of building a ship

is diminished when the shipbuilder is exper-

ienced. (Tr. 6 - 24-5) Since appellant was

an experienced shipbuilder, he considered

that the degree of complexity in construct-

ing the DD 936-8 and 943-4 was not very

great.

We cannot adopt the Government's narrow

interpretation of Factor (c) which would

ignore the evidence establishing the overall

complexity of building DD 931 class destroy-

ers, and render Factor (c) operable only in

situations where a contractor is to perform

substantial research and development or some

other extraordinary technical task. The

language in the factor relied upon by the

Government is intended to provide examples

of work considered to be complex but it is

not intended to be exclusive. Furthermore,

in the Government's view an inexperienced

=

ee Se re

DL PEE RE SNA om Henle ve oe

-87=

shipbuilder would be rewarded for performing

a difficult task while an experienced ship-

builder would not be rewarded for performing

the same task. We agree that a shipbuilder's

experience is relevant to determining the

degree of compexity of a given task confront-

ing it at the time of award, but we do not

agree that the element of experience controls

the applicability of Factor (c).

We determine that Factor (c) tends to

Support an allowance of additional profit to

appellant. We further find that because of

the experience element, Factor (c) supports

an allowance of additional profit under NObs-

3556 more strongly than under NObs-3648.

Factor (d) - Extent of Government

Assistance. This factor is stated as

follows:

"The Department of Defense encourages

its contractors to perform their con-

tracts with the minimum of financial,

facilities, or other assistance from the

Government. Where extraordinary finan-

cial, facilities, or other assistance

must be furnished to a contractor by the

Government, such extraordinary assistance

should have a modifying effect in deter-

mining what constitutes a fair and rea-

sonable profit or fee."

Facilities Assistance.

Effective 9 September 1940 appellant

and the Navy entered into Contract NOd-1534

(Exh. G-7), a facilities contract under which

appellant was to erect certain facilities

for use in constructing ships eventually put

to service in World War II. Under this con-

tract appellant was obligated to maintain

these facilities. This contract, as amended

-88-

from time to time, was in effect when NObs-

3556 and 3648 were awarded.

When appellant submitted its 14

November 1952 proposal for construction of

the DD 931-3, it stated that the acquisi-

tion cost pf Government-owned facilities

then in the Quincy yard was approximately

$19,546,000. Appellant further stated

that since these facilities were inter-

mingled with its own facilities, it was

unable to estimate the extent to which

Government-owned facilities would be used

to perform any resulting contract for the

destroyers.

In performing under NObs-3556 and

3648 appellant found that it had to use

certain facilities constructed under the

facilities contract such as railroad

tracks and water pipes, which were com-

mingled with similar facilities erected

at appellant's own expense. (Tr. 1-78,

3-80) However, the principal items

erected under the facilities contract were

a wet basin, lifting facilities, and an

armor shop to be used in the construction

of World War II type aircraft carriers —

and cruisers. (Tr. 6 - 55-8) From the

evidence presented we find that those

facility items were not usable for the

construction of DD 931 class destroyers.

(Tr. 1-78, 3-80, 6-58) Since the facil-

a ee ae ne ee Se Lee a eae a

-89-

obligations under the facilities contract.

For purposes of Factor (d) we find that

the facilities erected at Government

expense under the facilities contract did

not amount to extraordinary Government

assistance.

Financial Assistance.

NObs-3556 and 3648 both included

the usual provisions for payments based

on progress of the work less a reserve

against any cost to the Navy of correct-

ing defects developing during the guaranty

period for which the contractor is held

responsible. We find, as we did in the

reinstated Newport News appeal, that the

system of progress payments did not con-

stitute extraordinary financial assistance

from the Government within the meaning of

Factor (d). 3/

As indicated in our discussion under

Factor (a), NObs-3556 was awarded at a

price of $2,182,000 per ship in excess

of the per ship price offered by Bath

for construction of the same vessels. For

the three ships the total price difference

was thus $6,546,000. NObs-3648 was awarded

to appellant at a price of $758,000 per

ship in excess of the Bath price for the

ities contract required appellant to main-

tain and insure the facilities at its own i

expense, some of appellant's overhead

expenses were incurred as a result of its |

responsibility under the facilities con-

tract to maintain facility items having

no utility in the construction of destroy-

ers. (Tr. 6-58) The record in these

appeals does not indicate the extent to

which the overhead allocable to NObs-3556

and 3648 was attributable to appellant's

3/ The evidence establishes that the Govern-

ment withheld a reserve under NObs-3556 and

3648 of one to two percent greater than the

reserve withheld under the comparable con-

tracts with Bath, Ingalls, and Puget Sound.

Appellant contends that this discrimination

amounted to Government assistance in reverse.

However, we do not consider this contention

relevant to the application of Factor (d).

-90-

DD 936-8 on the basis of which NObs-3615

(for construction of the DD 940-2) was

awarded. Assuming the validity of a com-

parison between the Bath proposal for the

DD 936-8, and the award of NObs-3648 to

appellant for construction of the DD 943-4,

the difference between appellant's and Bath's

prices for the two ships awarded appellant

under NObs-3648 was $1,516,000.

In discussing the analysis which the

Board is required to make in determining

appellant's dependence on Government finan-

cial assistance, the Court of Claims stated

the following in Bethlehem Steel Corporation

V. United States, supra:

", . . If the dependence is great,

it is a minus factor in determining the

allowable profit. While the point may

be debatable, we think that the addition

of a bonus to a contract price to enable

the contractor to maintain uneconomically

large facilities in being is in reality

a form of Government financial assist-

ance and should be treated as such.”

Although the Court referred in this connec-

tion to the relevant ASPR weighted guide-

line, we consider that its comment is

equally pertinent to the application of

Factor (d) in the non-weighted guidelines.

Appellant contends that the disparity

between the award prices of appellant's two

contracts and the comparable Bath prices

should not be considered a bonus to appellant.

Appellant points to the manner in which NObs-

3760, 3761 and 3762 were awarded, and says

that greater costs borne by the Navy as a

result of its allocation policy constitute

a portion of the cost of the national defense.

-9l-

Appellant alludes in this regard to the

Merchant Marine Act of 1936, as amended

which, in 46 U.S.C. 1152, provides in part

that:

"In the event that a contract is

made .. . for a price in excess of

the lowest responsible bid which would

otherwise be accepted, such excess

shall be paid by the Secretary of Com-

merce as part of the cost of national

defense and shall not be considered

as a part of the construction-

differential subsidy."

As found in our discussion under

Factor (a) the paramount consideration dic-

tating the award of NObs-3556 to appellant

was the Navy's view that the Quincy yard

had to be kept in operation for national

security considerations. We thus agree

with appellant that the disparity between

the award price and the lowest proposed

price was a cost borne by the Government

in the interest of the national defense.

However, it does not follow that this addi-

tional cost to the Government is irrelevant

to a determination of fair and reasonable

profit. The disposition of these appeals

is to be governed by the ASPR non-weighted

profit guidelines, not by the Merchant

Marine Act or other statutes or regulations

reflecting different policy considerations.

As indicated above, a consideration pervad-

ing all of the non-weighted guidelines is

the basic policy of the Department of Defense,

to procure supplies and services from

responsible sources at fair and reasonable

prices calculated to result in the lowest

overall cost to the Government. If con-

siderations of cost to the Government had

been determinative, NObs-3556 would have

=92-

been awarded to Bath. In awarding this con-

tract to appellant, the Government put

aside considerations of cost in order to

keep the Quincy yard in operation. Viewed

from this standpoint, the award of NObs-

3556 to appellant constituted a form of

extraordinary financial assistance.

Appellant's reliance upon the circum-

stances leading to the award of NObs-3760, 3761

and 3762 lacks significant merit. The prices

proposed by the various shipyards for the DD

945-51 were not far apart if compared with

the relatively wide disparity between the

prices proposed by Bath and appellant for

the DD 936-8. Moreover, as stated previ-

ously, it is apparent that appellant did

not submit the lowest proposal if the cost

of plan work is taken into account. In any

event we find that the award of NObs-3760,

3761 and 3762 on the basis of the Navy's

allocation policy did not involve a finan-

cial sacrifice for the benefit of a con-

tractor approaching the magnitude of that

involved in the award of NObs-3556.

In the case of the award of NObs-3648,

we are unable to find that the Government

made the kind of financial sacrifice which

it made in the award of NObs-3556. Having

made the award of NObs-3556 to appellant

the Government was no longer confronted with

a clear-cut choice between allowing the

Quincy yard to shut down, or awarding appel-

lant a contract at a price greatly in excess

of the lowest proposed price. Indeed,

appellant's proposal was the only proposal

solicited. The Government would have us

compare the per ship price under NObs-3648

with the per ship price submitted by Bath

for the DD 936-8. However, Bath was awarded

NObs-3615 at about the same time as appellant

was awarded Nobs-3648. NObs-3615 involved

|

|

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:

)

-93-

three vessels in addition to the three vessels

Bath was already constructing under NObs-3371.

There is no evidence as to what price Bath

might have proposed had the Navy solicited

from it a proposal for construction of the

DD 943-4, an additional two ships to be

delivered at about the same time as the

three ships required under NObs-3615. 4/

Moreover the $16,250,000 award price per

ship under NObs-3648 was only $27,000 higher

than the price established in NObs-3760,

awarded to Bath eighteen months after the

award of NObs-3615; and was about $200,000

per vessel less than the price established

in NObs-3762, awarded to Puget Sound.

From the record presented we are unable

to find that the award price of NObs-3648

included a bonus to appellant measured by the

difference between the per ship price under

NObs-3648 and the per ship price offered in

the Bath DD 936-8 proposal. The record does

not establish that the Government might have

saved money by awarding this contract to

another shipyard. NObs-3648 was awarded to

appellant solely on the basis of the Navy's

allocation policy. In our opinion the allo-

cation of NObs-3648 to appellant did not,

in itself, amount to extraordinary financial

assistance within the meaning of Factor (d).

CONCLUSIONS UNDER FACTOR (d)

Consistent with the above quoted state-

ment of the Court of Claims as to the effect

4/ The delivery schedules under NObs-3615

and NObs-3648 were as follows:

NObs- 3615

1 April 1957

1 August 1957

l December 1957

NObs=-3648

June 1957

First Vessel

Second Vessel

Third Vessel

October 1957

-94-

of Government financial assistance in deter-

mining allowable profit, we conclude that

through the award of NObs-3556 appellant

received extraordinary financial assistance

within the meaning of Factor (d). Factor (d)

thus tends to depress the additional profit,

if any, to which appellant might be entitled

under NObs-3556 through application of other

guidelines. We further conclude that appel-

lant did not receive extraordinary Govern-

ment assistance under NObs-3648. Factor (d)

thus has no effect on the additional profit,

if any, to which appellant might otherwise

be entitled under NObs-3648.

-95-

In the present appeals we lack evidence

to support findings as specific as those which

we made in Newport News. The Bethlehem Ship-

building Division was only one of several

corporate divisions. The Shipbuilding Divi-

sion alone included eleven different ship-

yards in 1954. Because of its corporate

structure appellant was unable to determine

the equity and borrowed capital actually

invested in the Quincy yard. (Tr. 1-95)

However we find from the evidence presented

that the acquisition cost of Quincy facili-

ties capitalized under Bethlehem's deprecia-

tion policies totaled approximately

$11,322,000 in 1954. This total did not

include land, railroad properties, portable

tools and small equipment. (Exh. A-6) The

cost of replacing the Quincy yard facilities

in 1954 exceeded $50,000,000. (Tr. 3-30,

3-35) We further find that to some degree

all of the Bethlehem-owned facilities at

the Quincy yard were used to build the five

destroyers, although, for lack of other work,

these facilities were used at very low

Capacity. (Tr. 1-81) Furthermore, as con-

trasted with Bath, which subcontracted for

most of its design work, appellant's Cen-

tral Technical Department, financed out of

corporate funds, was available to perform

design work as necessary in connection with

construction of the destroyers. (Tr. 5-13,

5-55)

Factor (e) - Extent of the Contractor's

Investment. This factor is stated as follows:

"The extent of a contractor's total

investment (i.e., both equity and bor-

rowed capital) in the performance of

the contract will be taken into consid-

eration in determining the amount of the

fee or profit."

elena: Cn iD alee ne A Ae Seat ccs tite ard

Comparison with Newport News Investment.

In Newport News Shipbuilding and Dry

Dock Co. v. United States, supra, the Court

of Claims indicated that if the Board were

to find that capital was small in relation

to profit actually earned, Factor (e) might

operate adversely to the contractor. In our

decision on the reinstated Newport News

appeal we made specific quantitative findings

as to the contractor's assets (e.g. land

acreage, plant square footage, total equity

and borrowed capital). We further found

that except for certain ship repair facili-

ties, Newport News used all of its facilities

in varying degrees for constructica of the

RANGER.

Cente et eA ot ee late eS

In our decision in the reinstated

Newport News appeal we found that as of

31 December 1954, Newport News' investment

in total operations, expressed as both

equity and borrowed capital, totaled

$67,700,000. As indicated above we are

unable to derive a comparable figure with

respect to appellant's total investment

in the operations of the Quincy yard.

However, it is fair to state that as of

ene

ee

-96-

the award of NObs-3556 and 3648, most, if

not all, of the capital invested in the

Quincy yard was committed to the perform-

ance of those contracts. This capital

included facilities valued for replacement

purposes in excess of $50,000,000. As in

Newport News we are unable to find that

Capital was so small in relation to return

as to be an indicator of the possible gen-

eration of excessive profit.

Effect of Denial of Escalation.

In considering the impact of Factor

(e) on the disposition of these appeals,

appellant would have us contrast the Navy's

protracted refusal to pay appellant's esca-

lation claim with the relatively prompt

payments of escalation claims under NObs-

3371, 3760, 3761 and 3762. Appellant main-

tains that as contrasted with other yards,

appellant has been required to finance the

costs of inflation over a prolonged period

of time, thus committing additional working

capital to the performance of NObs-3556 and

3648.

In making this argument appellant

assumes a result in these appeals favor-

able to it. The possibility of a pro-

tracted dispute arising out of the esca-

lation clause has been considered above

under Factor (b). Furthermore none of

the other yards were paid escalation until

delivery of the required vessels was

accomplished, although the guaranty period

might not have expired. (Exh. A-14, A-18,

A-20) All of the contractors for DD 931

class vessels were on an equal footing

insofar as they had to finance the costs

of inflation during actual construction

of the vessels. In our opinion the Navy's

ee

-97-

refusal to pay appellant's escalation claim

is not relevant to the application of Factor

(e).

Had appellant not received the usual

progress payments, which was not the case

here, its investment in relation to return

‘would have been substantially increased.

We do take into account in applying Factor

(ad) the difference noted above between the

reserve withheld under appellant's contracts

and the comparable reserve withheld under

other contracts for DD 931 class vessels.

However this difference is insignificant

when viewed in the context of all of the

considerations relevant to the application

of Factor (e).

CONCLUSIONS UNDER FACTOR (e)

As indicated above we are unable to

find that appellant's investment was so

small in relation to return as to have a

depressing effect on the profit allowable

under other guidelines. We are also

unable to find that appellant's investment

was so large in relation to its return as

to support a profit allowance greater than

that considered allowable under other

guidelines. We thus consider Factor (e)

to be neutral as it affects the disposition

of these appeals.

Factor (f) - Character of Contractor's

Business. This factor is stated as follows:

"Recognition must be given to the

type of business normally carried on

by the contractor, the complexity of

manufacturing techniques, the rate of

capital turnover, and the effect of

each individual procurement upon such

-98-

business. For example, where a con-

tractor is engaged in an industry

where the turnover of working capital

is low, generally the profit objective

on individual contracts is higher than

in those industries where the turnover

is more rapid."

The Shipbuilding Industry.

Under this factor we are considering

characteristics of the American shipbuild-

ing industry as a whole at the time of

award of the contracts involved in these

appeals. With respect to the shipbuilding

industry at that time, we stated the fol-

lowing in our decision on the reinstated

Newport News appeal:

"One of the distinguishing features

of new ocean vessel construction con-

tracts, and a characteristic particu-

larly true of vessel construction by

appellant [Newport News], is that the

contracts normally are long-term,

requiring up to 5 years for comple-

tion of the vessel and sometimes an

added period for financial settlement.

The end product is large and complex,

requires a proportionate investment

in facilities, and the maintenance of

a large technical and engineering staff

and a work force of skilled people who

are difficult to replace, tending to

produce large and inflexible overhead

costs which can create greater losses

in periods of low activity than in

some other types of business. When

the Government is the customer under

a fixed price contract, payment is

normally slower than payment by a

private customer under a fixed price

-99-

contract. The low turnover of invested

capital and the other circumstances

described increase the demand for work-

ing capital. This was true of the

RANGER contract." (71-1 BCA at p.

40,447)

Evidence in the record now before us sup-

ports identical findings, with insignifi-

cant variations. We accordingly consider

the above quoted statement from Newport

News as applicable to the disposition of

these appeals.

Value Added.

In Newport News we further found that

"the end product, RANGER, obviously reflected

the addition of very substantial value to

the acquisition value of material prior to

its incorporation in the vessel." (71i-1l

BCA at p. 40,447) The following tabie

provides a comparison between appellant's

material costs and labor costs in con-

structing the five destroyers:

TABLE VII

Material Cost Labor Cost

DD 936-8 $23,558,600 $14,898,200

DD 943-4 15,917,400 8,712,100

Total $39,476,000 $23,610,300

(ASBCA No. 10316, Rule 4, Tab 4)

This comparison does not reflect the further

contribution made by appellant's facilities

and overhead personnel to the value added

to purchased materials. We accordingly

-100-

find, as we did. in Newport News, that in

constructing the five destroyers appellant

added very substantial value to the acqui-

sition value of purchased material incor-

porated into the vessels.

Appellant's Facilities and Personnel.

In 1954 the Quincy yard was among

the three major shipyards in the United

States, the two others being Newport News

and New York Shipbuilding Co. The Quincy

yard was large, covering 150 acres and

included complete shops and facilities.

Unlike other yards, Quincy manufactured

the propulsion machinery for ships it

built. During World War II the Quincy

yard was engaged in a shipbuilding program

at least as difficult and diverse as that

undertaken by any other yard. (Tr. 1 -12-

15, Exh. A-8) As mentioned previously,

appellant's Central Technical Department,

a large ship design organization, was

located at Quincy. Apprentice schools and

training programs were located at Quincy.

(Tr. 1-16) Between 1943 and 1953 total

employment at Quincy was almost three times

that at Bath (ASBCA No. 10316, Rule 4,

Tab 6). We find that for the purposes of

considering the application of Factor (f)

appellant's facilities and personnel com-

pared favorably with those of Newport News.

CONCLUSIONS UNDER FACTOR (f)

In Newport News Shipbuilding and Dry

Dock Co. v. United States, supra, the Court

of Claims stated the following in consider-

ing Factor (f):

"., . . The rate of capital turnover

is the ratio of invested capital to

-101-

sales. When a large and costly plant

is necessarily required to produce a

given volume of sales, the ratio of

profit to sales would be larger than

it should be if a small and cheap plant

sufficed for the same volume. Simi-

larly, if the ‘value added' is rela-

tively high that is, the completed

product has a high value in relation

to the value of the materials pur-

chased, the ratio of profit to sales

should be greater and in the converse

Situation, less. There is nothing

to show how the Board applied this

factor to the case at hand."

It is readily apparent from the above find-

ings, viewed in the light of the Court's

statement, that as a shipbuilder appellant's

rate of capital turnover was low and that

the effect of individual procurements upon

appellant's business was great, particu-

larly in periods of depressed activity

which was the case in 1953-4. We have

found that the value added by appellant to

purchased materials was substantial. Fur-

thermore, it is obvious from our discus-

sion under Factor (c) that highly complex

production techniques were involved in

the construction of the destroyers. We

conclude that Factor (f) tends to support

an allowance to appellant of greater

profits under NObs-3556 and Nobs-3648.

Factor (g) - Contractor's Performance.

This factor is stated as follows:

"In addition to the factors set

forth in 3-101, the contractor's past

and present performance should be

evaluated in such areas as quality

of product, quality control, scrap

-102-

and spoilage, efficiency in cost con-

trol (including need for and reason-

ableness of cost incurred), meeting

delivery schedules, timely compliance

with contractual provisions, creative

ability in product development (giving

consideration to commercial potential

of product), engineering (including

inventive, design simplification, and

development contributions), management

of subcontract programs, management of

Government property, and any unusual

services furnished by the contractor,

where a contractor has consistently

achieved excellent results in the

foregoing areas in comparison with

other contractors in similar circum-

stances, such performance merits a

proportionately greater opportunity

for profit or fee. Conversely, a

poor record in this regard should

be reflected in determing what con-

stitutes a fair and reasonable profit

or fee." 5/

_ Factor (g) is to be applied pros-

pectively. Newport News Shipbuilding and

Dry Dock Co. v. United States, supra. Thus

we are called upon to evaluate various

aspects of appellant's performance under

NObs~ 3556 and NObs-3648. Also relevant

1S appellant's performance under Navy

contracts, and its overall competence as

+ saan prior to the award of NObs-

5/ ASPR 3-101, relating to price negotia-

tions, does not add any additional consid-

erations relevant to the disposition of

these appeals.

-103-

Quality of Vessels Delivered Under

NObs=3356 and NObs-3648.

Most of the evidence under this head-

ing involves a comparison between the DD 931

class destroyers delivered by appellant and

those delivered by Bath. Mr. Miller testi-

fied that the principal measure of ship

quality is the number of defects discovered

during the course of acceptance trials and,

later, during periods of post fitting-out

and post shakedown availability. (Tr. 5 -

155-6) The evidence establishes, and we

find, that the Navy considered that the DD

931 class vessels delivered by appellant

and Bath were all of very good quality.

(Tr. 5-10)

However, in at least two significant

instances, vessels delivered by Bath were

defective, whereas the vessels delivered

by Bath under NObs-3371 included Westing-

house turbines. During acceptance trials

the turbine rotors cracked when operated

at the intended revolutions per minute

(rpm). The Navy accepted the ships which

had to be operated at reduced rpm pending

redesign of the rotors to eliminate the

cracking problem. Because of this defi-

Ciency the contract price of NObs-3371

was reduced by $30,000. (Exh. A-13)

Appellant's turbines, manufactured by

General Electric Company, did not exper-

ience the cracking problem. (Tr. 5-22-5)

The problem with the Westinghouse turbines

was attributed to defective manufacture on

the part of Westinghouse. (Tr. 5-26)

Prior to the award of contracts for

DD 931 class vessels, Bath had constructed

the DL 2 and 3, and appellant had con-

structed the DL 4 and 5. All four vessels

-104-

included Westinghouse turbines which

experienced similar rotor cracking prob-

lems. Appellant's decision to procure

General Electric turbines resulted from

its previous experience with the Westing-

house turbines. Appellant decided that

the quality of the Westinghouse turbines

was deteriorating from an engineering

standpoint. (Tr. 6-65) The record does

not disclose the reason for Bath's deci-

sion to install Westinghouse turbines in

the DD 931, 932 and 933.

Bath later encountered difficul-

ties in connection with the forced draft

blowers installed in the DD 945-7. The

forced draft blower was an integral part

of the boiler combustion system. At the

time the DD 93l program commenced, West-

inghouse was the sole source for such

blowers. The Navy then decided to

develop alternative sources for what

was viewed as an essential and expensive

piece of machinery. (Exh. A-16) After

appropriate testing, blowers developed

by Carrier Corporation and Hardy-Tynes

were placed on the Qualified Products }

List, meaning that they met the Navy

specifications for blowers. (Tr. 5-15-16)

Due to a protracted strike at

Westinghouse, Bath decided to procure

blowers from Carrier Corporation for

installation in the DD 945-7. When the

DD 945 was taken on builder's trials,

in April 1958, it was found that the

Carrier Corporation blowers would not

Operate in parallel, resulting in failure

of the vessel to achieve its full power

requirements. The Navy informed Bath

that it would not accept the DD 945-7

due to the blower problems. Bath

-105-

decided to order replacement blowers from

Westinghouse, but then found that it

could not cancel its contract with Carrier

Corporation unless it were willing to

incur substantial cancellation charges.

The Navy then agreed to accept the DD 945

for limited service, with the understand-

ing that the guaranty period would be

extended indefinitely until satisfactory

blowers were installed. Carrier then pro-

duced modified blowers, which performed

as intended. (Exh. A-16; Tr. 5 - 17, 18)

The reports describing the results

of preliminary acceptance trials of the

DD 936-8 and 943-4 indicate a few defects,

but none which appear to have affected the

overall operational capability of the

vessels (ASBCA No. 10316, Rule 4, Tab 4).

Appellant contends that the turbine

cracking problems encountered under NObs-

3371, and the forced draft blower problems

encountered under NObs-3760, reflect

adversely on Bath's performance as com-

pared with appellant's performance under

NObs-3556 and 3648. The Government acknowl-

edges that it held Bath contractually

responsible for correction of the defects,

but contends that since the defects were

attributable to the malfunctioning of

vendor components which had been certified

on the Navy's Qualified Products List for

use by shipbuilders, the defects should

not be taken into account in evaluating

Bath's performance. The Government fur-

ther argues that since many pieces of

equipment on a ship malfunction at the

time of delivery, isolated defects such

as these are not relevant to evaluating

comparative performance for the purpose

of applying Factor (g).

-106-

We agree with the Government that

the defects in the Bath ships relied upon

by appellant should be considered in con-

text for the purpose of applying Factor (g).

However, the difficulties experienced by

Bath in connection with the turbines and

forced draft blowers were significant, and

we find that as compared with the vessels

delivered by appellant, they detracted

from the overall quality of the Bath

vessels. In the case of the forced draft

blower problems, arising under NObs-3615,

we agree wit

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